You hear people talking about net worth all the time. Beyonce’s net worth is $355 million, Oprah’s net worth is $2.6 billion, Bill Gates’s net worth is $103.4 billion, but what do these numbers even mean?
What Exactly Is Net Worth?
Net worth is probably the single most important measure of personal wealth. Essentially, it is a literal measure of how much someone is worth. Net worth is the amount by which assets exceed liabilities. An easier way to put that is that it’s the value of everything you own, minus everything you owe. Positive net worth means that assets exceed liabilities while negative net worth means the opposite.
Keep in mind that your net worth is not about your income; your income actually does not factor into your net worth at all. Net worth only includes savings, investments, and debts. So regardless of how much you make, you can build a good net worth.
Is Net Worth Important?
YES! Your net worth is extremely important. Net worth is the most accurate measure of wealth. You cannot know how wealthy you are without knowing your net worth.
Think of it as a financial report card. Thinking of net worth that way can allow you to evaluate your current financial situation and can help you figure out what you can improve upon in order to reach your financial goals. A growing net worth is the best sign you’re moving forward, while a declining net worth means you have more work to do.
Another way that net worth is important is that it allows us to look at the bigger picture. Let’s face it, most of us are preoccupied with making more money. We want a raise, a better career, or even a side hustle, but income isn’t everything.
Yeah… I said it, income is not everything! Like I always say, it’s not how much you make, it’s what you do with it.
Income is irrelevant when it comes to net worth, especially when you are drowning in debt and have very few assets; unless you put it to work for you. Conversely, income is also irrelevant if you make a low annual salary but you keep your expenses low and allocate your extra cash to the appropriate channels.
Also, your net worth helps measure your wealth by forcing you to include your liabilities. Many people focus solely on their assets and simply “forget” their liabilities. For many so-called “rich” people, their liabilities are invisible. For example, they may proudly claim to have $500,000 in assets, while ignoring $450,000 in debt. It is not the size of either number that counts, but rather the difference between the two. In all actuality, this person’s net worth is only $50,000. Not so rich now, huh?
Additionally, net worth is important because lenders look at it when considering letting you borrow money. As I said previously, net worth is the most accurate measure of wealth. So what better way to evaluate your financial situation than to look at your net worth? Your net worth can influence whether or not a lender will or will not approve you for a loan.
How Do You Calculate Net Worth?
First, list your assets (what you own), estimate the value of each, and add up the total. These include items like money in your bank accounts, the value of your investment accounts, your car, the market value of your home, business interests, personal property (such as jewelry, art, and furniture), and the cash value of any insurance policies.
Next, list your liabilities (what you owe) and add up the outstanding balances. Include items such as your mortgage, car loan, credit card balance, and student loans.
Finally, subtract your liabilities from your assets to determine your personal net worth. When put into a mathematical equation, it would look like this:
Assets – Liabilities = Net Worth
Can I Improve My Net Worth?
Yes! You can always improve your net worth. There are essentially only two ways to improve your net worth: Increase your assets or decrease your liabilities. Either option makes the difference between your assets and liabilities larger.
Increase your assets: In order to increase your assets, you must first review your assets and your annual income. Make sure your assets are functioning at peak level and getting you the most return possible. Here are a couple tips to increase the value of your assets:
Make sure that your savings are in a high yield savings account, with at least a 2% interest rate. I have mines at Marcus by Goldman Sachs, and my interest rate is 2.25%. This is a hell of a lot higher interest rate than most banks’ average of .09%. So your savings account just sitting there making .09% can make you 2.25% somewhere else.
Make sure that you are investing in retirement accounts. If a 401(k) is available to you through your employer, then please open an account and contribute every pay period. If your employer offers a contribution match always contribute at least as much as the match. If your employer does not offer a 401(k) then open an IRA. Aim to allocate at least 10% of your take-home pay to retirement investing. This money grows tax-free and accrues interest, so it’s a sure-fire way to boost your net worth.
Make sure you are investing outside of your retirement accounts. If you have surplus money after paying all of your bills and contributing to your retirement accounts you should be investing. You can choose the investment vehicle that suits you best, such as CD’s, Money Market Accounts, Bonds, or Stocks. Once you have picked an investment vehicle, or a couple, aim to invest at least 10% of your income.
Additionally, try to increase your income. Ask for a raise at work or start a side hustle. Any extra income you have coming in can boost your net worth if you allocate it correctly to maximize its value.
Decrease your liabilities: In order to decrease your liabilities, you must also review your liabilities. When reviewing try to find areas that you can improve upon. Here are some tips to help decrease the value of your liabilities:
Trim expenses where you can. Look at your budget and try to figure out what is necessary and what is not. Cut out unnecessary spending. Also, try to spend less on what is necessary, like groceries, gas, or electricity. Doing this will free up money to put towards paying off debt or increasing your assets.
Get out of debt! Pay off loans, pay off credit card debt, pay off your car, and pay off your mortgage. Every dollar you pay towards your debt is a dollar added onto your net worth. Plus, once you have gotten yourself out of debt, all of the money you used to pay towards that debt is now free to be used towards increasing your assets, and ultimately your net worth.
You can try to improve your net worth however you choose, building up your assets while keeping your debts level, paying down your debts while keeping your assets level, or a combination of both. Regardless of the route you take, as long as you are working towards increasing your assets or decreasing your liabilities you are working towards increasing your net worth and your wealth in general.