Many financial planners discuss net worth statements with their clients and in their content online. However, if you’re like most people, you might be a little bit confused about what, exactly, your net worth is – and why it matters.
What is Your Net Worth?
Net worth is the amount of your total assets minus the amount of your total liabilities. In short, it’s giving you a clear idea of what your “worth” is while taking everything into account. This means you’re looking at cash assets that you may traditionally think of as part of your financial life such as retirement accounts, cash savings, and investments. It also means that you look at non-traditional assets such as your vehicle, a small business you own, or any property you own.
You’ll also be carefully examining your debt in order to get a handle on your net worth, which can be daunting. Understanding the full balance of your debts from student loans to credit cards can help you to put together an organized repayment plan and to help you calculate your net worth.
How Do You Calculate Your Net Worth?
The good news is that calculating your net worth is incredibly easy! Your total net worth can be calculated using the following equation:
Your Assets – Your Liabilities = Your Net Worth
It really is as simple as that. However, if you’re like many young graduates, you may find that your current net worth is negative. That’s okay! Although you don’t want your net worth to be negative for an extended period of time, if you’re just starting to pay down student loan debt things may be inverted for a little while. At the end of the day, you want to be tracking an upward trend in your total net worth as the years go by.
Why Does It Matter?
While your net worth will yo-yo up and down over the course of your life, your net worth is an easy way for you to gain a big-picture snapshot of your financial life and assess progress you’ve made toward your goals. It can be easy to view debt as a part of your life that isn’t necessarily negative, especially if your primary debts are student loans. Because student loans are common, especially among the professional community, it’s easy to dismiss them as “good” debt and continue to either overspend as you live an inflated lifestyle or to take on consumer debt because you view yourself as debt-free as your student loans “don’t count.”
The truth is that no debt is good debt, and you want to be actively working to become debt free – and that includes any debt you accrued as a result of your college and graduate education. To calculate what your net worth “should” be, you can use the following equation:
Net Worth = (Your Age – 25) x (Gross Annual Income / 5)
Remember: if you’re calculating your net worth using this equation and it’s lower than you feel it should be, it’s okay. As you work to dig yourself out of any debt you have accrued, especially if you’re relatively newly out of residency, this number will slowly start to go up. You don’t need to obsessively check your net worth statement against this equation, either. Instead, make a point to check in quarterly or even annually to see if you’ve made positive progress. If you do check in and find that your net worth falling, take the time to look at your habits and find out why!
What You Need to Know
It’s true that your net worth is just a number, but it can be helpful to guide you in determining what financial changes you need to make to achieve long-term growth and big-picture goals. When you check your net worth, you’re looking to gauge a few specific things:
- Whether or not you’re comfortable with your net worth. Is that number reflective of where you want to be financially? If not, how can you work to correct it?
- Is your net worth generally trending upwards?
- Are you stuck in a negative behavior pattern that is negatively impacting your net worth?
- What liabilities are hurting your bottom line, and how can they be minimized? For example, you might look into PSLF, or possibly consolidating student loans that don’t qualify for PSLF.
Calculating your net worth isn’t, in itself, an action that will have an impact on your financial life. However, it can act as a bit of a wake up call and give you a clear picture of how your finances are working for you – or against you.