Know thyself. This classic maxim from ancient Greece is as much true for knowing about your personality and quirks as it is for knowing about yourself financially. And one of the best ways to understand yourself financially, in a holistic sense, is to calculate your net worth.
Sure, you may hear the phrase “net worth” most frequently bandied about in reference to people like Bill Gates ($96 billion), Mark Zuckerberg ($62 billion) or Jay-Z (a measly $1 billion). Despite being a financial term you most often associate with people who are out of your tax bracket, it’s true that you have a net worth, too.
Whether that net worth is negative (which is fairly common among those earlier in their careers) or more than you imagined, the number is out there if you look for it.
So, how do you find out what that net worth is? What does your net worth even mean? Why do you even need to know this number at all?
Let’s investigate. Because no matter what your net worth is, you’re worth it.
What Does Net Worth Actually Mean?
Your net worth is, much like something you learned in your 10th grade math class, a simple formula that just seems a lot more daunting than it really is.
The formula is as follows:
Assets – Liabilities = Net Worth
Simple, right? Just like E = MC². Or A² + B² = C². Or whatever the quadratic formula is (Does anyone remember it? Anyone?).
But just like these classics, the hardest part often comes not with knowing the formula but with knowing what figures to plug in. And once you know these figures, what will this leave you with?
Well, your net worth, which is another way of assessing what you own vs what you owe.
You’re more than the sum of your parts. You’re also funny, cool and smart. But your current financial health assessment can come from this above equation.
It’s important to remember that the so-called “money in the bank” is not the actual amount of your finances. There’s so much more that goes into it.
Confused? Let’s unpack.
Assets basically boil down to what you own, namely your money and your things. There are a couple of different kinds of assets.
The obvious ones:
- Financial Assets: Money in your savings accounts, checking accounts or even cash hidden under the mattress or in the floorboards all count toward your assets. Money in your 401k account is also included in this bucket.
- Tangible Assets: Your stuff. Namely, anything you own that is of value and that you can physically touch and see. Your home, your car, the espresso machine for the coffee shop you own, the espresso machine in your own kitchen. Your grandmother’s jewelry. Your boat. Your original Picasso painting (dream big!). Even a designer dress could be considered part of your assets if it’s of considerable and saleable value.
Calculating Your Home Value
Calculating the value of your home can be a task in itself. It’s always important to research the value of the homes around you, the size of your home, any deferred maintenance on the home, property or things like appliances are, and additional benefits (parking spots, backyard space, room counts, etc.).
There are also a number of home value calculators online. The house price index calculator is approved by the Federal Housing Finance Agency.
Other options include a comparative market analysis, or a CMA. This is a consultation provided by a market professional, usually a real estate agent. Thus, it lands closer to an estimate but is still more reliable than an online estimate or your own best guess.
The real estate agent will usually perform a walk-through of the home to note any upgrades or deferred maintenance and take this into consideration for market value.
It is not unusual for people to call the real estate agent that helped them purchase the home to perform this market assessment. The most reliable way to find the value of your home is through a valuation by a licensed appraiser, can vary by home size and other factors.
Then, we have the more conceptual assets:
- Liquid Assets: Items like stocks, bonds, mutual funds or ETFs that are easy to sell quickly and whose sale will not greatly affect their price. If you’ve ever heard the term “liquidate your assets,” this is what they were talking about.
- Fixed Assets: These are items that would take a longer time to convert to cash. These assets are often deposited for extended periods of time in exchange for high-interest accrual and thus cannot be cashed before their agreed-upon time frame is up. An example would be tangible items that can take a longer time to sell. This could potentially include your home, land or other property, a designer wedding dress, or high-value jewelry.
- Equity Assets: You know that girl from college who became so-called “Employee Number Eight” at Start-Up X? This is why she’s rich now. Equity assets include your shares in a company. Employee Number Eight got in early, and now her stocks are valued high.
Intangible assets, such as brand recognition for a company or any other intellectual property like patents, trademarks or even goodwill, do not factor into your net worth due to the complexity of measuring their value. We’re sure Coca-Cola would hardly sell as much without their brand name and logo. But how much? Who could know?
Now, to discover the first number of your equation, all you have to do is add up all those assets. You’re halfway done with your formula!
AKA, your debts. This part is definitely less fun, but don’t be so hard on yourself! Almost 87% of American families (ages 36-44) have debt.
The following categories are what most often make up your liabilities:
- Loans: Auto loans, student loans, personal loans, business loans, etc.
- Credit card balances: This only counts as a liability if your balance is not paid off in a timely fashion at the end of the month.
- Mortgages: Mortgages function as a home loan although the loan comes from someone or some organization that holds a lien (a claim) on your property for the amount of the outstanding mortgage.
While liabilities are on the (literal) negative side of the net worth equation, it doesn’t have to say something bad about your finances. For example, student loans or home loans may be seen as necessary—and even respectable.
Credit card debts from spending outside your means on items that won’t add to your wealth (repeat: stay away from the mall) aren’t great. However, they are also easily fixable with the right plan and discipline.
Net Worth and Numbers
So, how do you stack up? You may not be George Clooney (estimated net worth: $500 million) or an Olsen twin (estimated net worth: $300 million), but these individuals are a far cry from the rest of our society.
According to a 2017 Federal Reserve report, the average net worth of households in the United States from 2013-2016 was $692,100.
Sound like a lot? Let’s take it back to math class. Remember that an average can be significantly weighted by an extremely high (or low) number at either end.
The average is weighted by, you guessed it, the extreme upper class. Not exactly the Joneses next door that you’ve been trying to keep up with.
Thus, sometimes the median number can be more telling than the average. In the case of net worth, this rings true. The median household in the United States has a net worth closer to $97,000. For Americans between the ages of 35 and 44, that number is even lower at $59,800 and even just $11,000 for those under 35.
Some experts have said that millennials have concerningly low net worths compared to their parents and other earlier generations, clocking in at 36% lower than the same demographic just over ten years ago in 1996, according to a recent study by Deloitte. However, according to this study, the millennial generation will experience the fastest growth rate of net wealth.
What Does It All Mean and Why?
Your net worth, whether on par with these median or average numbers or even in the negatives, is no reason to completely freak out.
Your net worth is, of course, never set in stone. Rather, it is a snapshot of where you currently stand financially. For younger earners (anyone under 40 these days), this simply means you have yet to earn or invest enough to balance out your liabilities and borrowing, which is totally fine. Those elders have been earning for decades, how could we keep up?
As we enter new life stages, economic eras, and settle our early life fluctuations in job, lifestyle, and location (which can be major debt creators), our finances will be redistributed both within our own accounts and throughout American families. All this not to mention the delights of compound interest!
It’s important to keep abreast of your net worth because, while this number may fluctuate depending on factors such as stock values, interest rates, and other tides of the financial world, it’s important to have an idea of overall trends so you can generally understand your financial health and have an idea of your true wealth.
Rather than focusing on the particular number, it’s a good idea to focus on your gains year over year rather than the number you get at the end of the equation.
True wealth can be an important factor in knowing when you might expect to retire (and you may want to start planning now).
Finally, knowing your net worth is a great barometer for knowing how you can make it grow. It can be a good tool to leverage your debts and then work to pay them off in order to increase that net worth surely and steadily. It can also help lead you to paths and investments that can work to create steady gains.
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