What is Net Worth?
Net worth is perhaps the most important number in personal finance. Net worth measures the value of your financial position.
Wealth is what you accumulate, not what you spend.
Why is Net Worth Important?
Knowing your net worth is important because it provides a holistic view of financial well-being. By keeping track of your financial well-being, you can identify areas where you can improve, ultimately leading to wealth creation.
How is Net Worth Calculated?
Net Worth is calculated as follows:
Assets – Liabilities = Net Worth
If you subtract all of your assets from all of your liabilities then you will arrive at your net worth.
What are Assets?
Assets are things you own such as your house, clothes, car, furniture, stocks, bonds, etc. However, not all assets are created equal. For instance, some assets depreciate in value (lose value over time) while other assets appreciate in value (increase in value over time).
Typically, a car is one of the best examples of a depreciating asset and your house is typically a one of the best examples of an appreciating asset.
That being said, there are compelling arguments for why some of the typical assets should fall into the liability category (such as your personal residence). For the purposes of this article, I am going to include all things you own as assets.
What are Liabilities?
Liabilities are all things you owe such as your mortgage, student loans, and consumer debt. Just as some assets are not created equally, so to are debts. For instance, your mortgage is the quintessential example of good debt. On the other hand, credit card debt is the poster child for bad debt.
Where do You Fall?
Below is a chart of the average and median American’s net worth by age as well as where you should be for retirement purposes. The average net worth is calculated by taking the entire net worth of all people in an age group and dividing it by the number of people in that age group.
However, there are outliers that skew the value higher and lower (for instance, people like Mark Zuckerberg are skewing the average net worth higher for those in their 30s).
The median is the middle value. Half of the population is higher than the middle and half is lower than the middle.
|Age Group||Average Net Worth||Median Net Worth||The Goal|
|< 35 years old||
|$11,100||Save 1x your salary by 30; Save 2x your salary by 35|
|> 35 – 44 years old||$288,700||$59.800||Save 3x your salary by 40|
|> 45 – 54 years old||$727,500||$124,200||Save 6x your salary by 50|
|‘> 55 – 64 years old||$1,167,400||$187,300||The finish line is in sight – save as much as you can|
|‘> 65 – 74 years old||$1,066,000||$224,000||Retired|
What Your Net Worth Should Be
I recently read the book The Millionaire Next Door by Thomas Stanley, PhD. In the book, the author explains a rule of thumb for calculating how much your net worth should be given a person’s age and income.
Fortunately, the math is simple:
Age * Pretax Income from all sources (Excluding Inheritance) / 10
For example, if you are 41 years old and have a pretax income of $155,000, then your net worth should be $635,500.
41 years old * $155,000 = $6,355,000 / 10 = $635,500
- Keep track of your financial well-being by periodically calculating your net worth and checking your credit score. These two areas act as a “report card” for you to identify areas where you can improve leading to wealth creation.
- Based on your “report card”, identify your financial goals and develop a plan to achieve them.
- Remember, no matter what situation you are in, you can improve your circumstances. If you feel like looking through your personal finances is intimidating, possibly even scary, consider if you would benefit from money coaching.