Why It's Important to Know Your Net Worth
Here, let's learn more about what your net worth is, how to calculate it and the role it plays in your investment strategy and finances.
What is “Net Worth”?
Net worth relates to all your assets minus liabilities (i.e., "what you own minus what you owe"). For example, if your house is worth $1,000,000 and you have a $500,000 mortgage, then you own $500,000 in equity.
How do I Calculate My Net Worth?
First, take an inventory of everything you own. Net worth commonly includes cash, investments, property, vehicles, and anything else you own. To get a proper estimate for depreciating assets (ex.- cars), you may need to research how much they are currently worth. Your net worth can also include assets you are paying off (such as a home) because you subtract what you owe.
Here are items to include when calculating your net worth (although this list is not exhaustive):
- Checking accounts
- Savings accounts
- Other cash
- Mutual Funds
- Treasury bills
- Other investments
- Real estate (market value)
- Investment properties
- Jewelry, art and collectibles
- Other property
- Retirement accounts (IRA, 401(K), pension plans, etc.)
- Social security
- Other retirement assets
After you have an inventory of everything you own, subtract what you owe. Below are examples of some liabilities:
- Auto loans
- Credit card debt
- Consumer loans
- Student loans
- Unpaid taxes
After subtracting your liabilities from your assets, you will have your net worth.
Net Worth and Your Financial Health
There are many caveats and considerations with net worth. For example, net worth doesn’t include your annual income, so a person with a high annual income but with higher expenses could have a lower net worth than someone with a lower annual income that invests in appreciating assets (real estate, REITs, stocks, bonds, etc). When focusing on growing your net worth, you might look at investing in appreciating assets and lowering their debt and liabilities.
A financial advisor may consider your net worth along with your lifestyle as well as the amount of money you have ready to invest in addition to looking at whether or not you are accumulating wealth.
Understanding your net worth is just one component that’s important to your overall financial health.
This content is developed from sources believed to be providing accurate information and provided by Joseph Cappuccino & Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.