Your net worth tells you—and others—a lot about your level of financial well-being.
A high net worth can be a benchmark of success. Having a large amount of money stashed away provides financial freedom and eliminates the worry of being swamped by bills and other expenses.
On the other hand, a low net worth might indicate financial trouble and the need to address spending problems before they get out of control.
Fortunately, calculating your own net worth is relatively simple. Once you know this number, you will have a better understanding of where you stand financially, and what you need to do to improve your relationship with money.
Understanding Net Worth
Net worth is simply the total of all your assets after subtracting all your financial liabilities.
Your assets include things such as:
- Any cash you have in the bank
- Any cash you have in the bank
- The total of your investments, including money in retirement accounts
- The equity you have built up in your home
- The value of big-ticket possessions that you can sell, such as your car
- The value of other items ranging from jewelry to collectibles
Liabilities may include things such as:
- The balance remaining on your loans, including a mortgage, car loan, personal loan or student loans
- Credit card debt
- Monthly expenses you have yet to pay, including rent, utility bills and taxes you owe
How to Calculate Net Worth
The net worth formula includes some very basic math. On the one hand, you need to add up all of your assets.
Then, you need to do the same with all of your liabilities, and subtract this total from your asset total. The result is your net worth.
So, the basic equation is as follows: assets – liabilities = net worth
A positive net worth likely means you are living well within your means and not outspending your income. That type of behavior helps you build a nest egg of savings that can provide financial security for years to come.
Unfortunately, millions of people have a negative net worth. This sets them up for a lot of stress and leaves them vulnerable to a financial crisis should unexpected expenses arise.
In many cases, people with a negative net worth have to go deeper into debt just to pay the bills, which can make their financial situation even worse over time.
Improving Your Net Worth
If your net worth is modest—or is even in the red—don’t despair: There are plenty of ways to turn things around.
Shoring up your bottom line begins with cutting costs and eliminating debt. It’s crucial that you find a way to live within your means. Once your spending is under control, you can begin to work on increasing financial assets.
Tips for improving your net worth include:
Building a Budget
Many people find budgeting to be among the most important net growth strategies. A budget is a spending plan that takes your income and expenses into account. Think of it as a roadmap you can follow on your journey to financial improvement.
Cutting Expenses
With your budget in place, you should be able to quickly identify the areas where you spend too much. Look for unnecessary expenses—such as subscriptions and trips to the coffee shop—and reduce or eliminate them.
Tracking Spending
Tracking personal finances by keeping a log of all your spending is a great way to monitor your new efforts to cut costs. Write down every dime you spend over a few weeks or months. Or, use an app on your phone to do the job.
Paying Down Debts
Carrying too much debt reduces your net worth day by day, month after month. This is especially true of debt with high interest rates, such as credit card debt. Paying down and eventually eliminating debt is crucial to boosting your net worth.
Building an Emergency Fund
Stash cash in a savings account that you can tap when unexpected expenses arise. Many experts suggest saving enough to cover three to six months of costs. Knowing you can turn to this emergency fund can help keep you out of debt when money troubles arise.
Developing New Sources of Income
Finding ways to boost your savings can provide you with the cash to both pay down debt and increase your savings. So, consider taking on a part-time job or developing a side hustle that can increase your take-home pay.
Investing Some of Your Savings
As your savings start to grow, consider using some of your cash to invest in stocks, income-producing real estate or other ventures. Using your savings as a tool to grow wealth is a crucial part of increasing your net worth.
Building Wealth Over Time
As your spending and saving patterns improve, you should see your net worth begin to grow.
At first, the gains may be relatively small. But over time, these increases will likely compound, resulting in a meaningful improvement to your bottom line.
Investing in a 401(k) plan or IRA, directing cash to a high-yield savings account and purchasing rental real estate are all proven ways to speed the process of growing net worth.
Patience and diligence are the keys to making the process work. And remember to avoid bad habits—such as overspending your income and falling into debt—that can quickly erase your gains.
Sticking to sound money-management practices is essential if you want to grow your net worth and eventually achieve financial wellness.
