What is net worth? Net worth is calculated by taking the sum of all of your assets (things of value that you own) and subtracting all of your current debts. This amount left over after that simple calculation shows you a very clear cut image of your current financial standing. This number is a very powerful number and can show you how well you are doing at building wealth overall. I will show you throughout this article why your net worth is such an amazing indicator of your current standings of your personal finances.
Net worth can be negative and it can also be positive… In most cases in the United States in many cases net worth can be negative as a majority of the population is trying to get out of debt. Especially in cases after a large debt has been taken out. For example if you just took out a large mortgage on your dream house or are fresh out of college just starting to pay back on student loan debt , that debt will go against you and could pull your net worth down enough it is negative.
Below is a net worth calculation example. Please take a second and do this now so that you know your number, we will talk about in the next section why it is so vital to know your net worth. And be honest with yourself to input the correct numbers, no need to inflate this number as a realistic view is the most helpful!
Take all the assets – debts = Net Worth
- Assets (248k 401k)+(8k Emergency fund)+(7k Car equity)+(150k home equity) =413k
- Debts (3k car loan) + (100k mortgage) + (19k student loan) + (1k credit card)=123k
- 413k-123k=290k Net Worth
Not too tough see! The hardest part is just corralling all of the details to get the right numbers for all of your assets and debts to just plug into the very simple equation and you are off to the races.
Average Net Worth in America
The single household average net worth in America is $692,100 according to Federal Reserve Survey of Consumer Finances This you have to remember is an American household, so in many cases this is the net worth of two individuals. Also you must include that there are large outliers on both sides of this figure with some being very wealthy individuals and others being poor savers and bringing the average down. That seems like a very large number right?! I know it did to me upon first seeing it during my research to right this article. Lets dive a little deeper into that number for kicks.
the survey by the federal reserve was for the time period from 2013 to 2016. This is smack center of one of the best bear markets of the current millennium. Therefore, the larger number has some to do with the large rise in value of assets in the stock market and during a powerful resurgence of the real estate market. Also, this survey includes those of all ages including young savers post grad along with those that have had time for money to grow with compounding interest in tax advantaged accounts for a long period of time upwards of 40 years. the survey by the federal reserve was for the time period from 2013 to 2016. This is smack center of one of the best bear markets of the current millennium. Therefore, the larger number has some to do with the large rise in value of assets in the stock market and during a powerful resurgence of the real estate market. Also, this survey includes those of all ages including young savers post grad along with those that have had time for money to grow with compounding interest in tax advantaged accounts for a long period of time upwards of 40 years.
- 35 years old or younger = $76,200
- 65-74 years old = $1.07 Million
This breakdown of the median net worth in America shows a couple obvious things that with age and consistency, using the power of compounding interest net worth grew substantially from 35 to 65. Also that if you are younger and reading this thinking of your personal finances, don’t get scared that you aren’t tipping the scales positively with your net worth. Being young just means that there is ample time to grow taking advantage of compound interest!
Knowing your net worth first of all just helps get your financial house in order. This gives you a look at if you are positive or negative and how much. It may be scary checking your net worth for the first time, because depending on age and current situation, as stated prior in this article, you may in fact be negative. I just want you to know that is totally fine, you are not alone, many people are or have been negative in the past. At the time of writing this article, I am quite substantially in the negative for my net worth. Being just out of an expensive Doctoral program at a University. However, I am well aware of my exact number and am making very focused steps to constantly improve this number with my daily/monthly actions.
I currently am paying very aggressively on my student loans with a minimum payment of over 2k monthly, investing 15% of my income into the company 401K, investing and saving in other mediums, and then paying off other debts such as parent plus loans. Therefore, if I only focused solely on that debt number with my current strategy I would not see as much progress as I am actually making in respect to my net worth. But when I view this from a net worth perspective I get to see the positivity of the aggressive student loan pay down along with all of my investing and savings efforts come together, I hope you can see how it can be quite a powerful change of perspective. If this change in perspective even motivates you enough to pay a little more on those loans each month or a couple percentage more into your 401k or other employer sponsored accounts, It would make my year!
Positive View of Net worth
I have seen the positive impact of checking my net worth, and saw the dividends it has payed for me since initially calculating this. Being fresh out of graduate school and severely in student loan debt, it was easy to focus solely on the large amount of school debt I had and feel like an absolute loser. And let me tell you, I actually did feel that way for some time. As I continued to research personal finance more avidly, I decided to check my net worth. After paying aggressively on my student loans, investing in tax deferred employee offered accounts, including prior savings, etc. I was able to see my whole financial picture, which actually truly made me feel better in my situation, as I didn’t have any other debts and my current assets, although small being just out of school, did help me see that debt was not the only part of my financial picture.
There are many reasons that tracking net worth during paying off debts or building wealth is such a great method. First, we are all trying to build wealth, and the net worth as explained above is measuring just that, your current standing of wealth. The second is that both paying off debt and building wealth via saving or investing positively affect net worth. As you pay down debts, there will be less debt weighing down your number. Likewise, as you invest money or save that will positively affect the net worth. So if you are tracking it while you are completing both of these activities with focus and a full head of steam, I have no doubt you will see that net worth climb. You are hitting it with both sides of the blade, this is why watching your net worth climb as you continue to make good decisions can be such a powerful and enlightening, as well as encouraging piece of personal finance information.
Thank you for reading! I would love to hear your feedback, and to answer any questions you might have!
How do you use your net worth in your personal finances? And how did you feel about the Federal Reserve Survey data from 2017?