I always wonder how many people have a million-dollar net worth and have no idea.
What if, one day, you randomly opened your brokerage account (after taking a hiatus from checking it for 10 years) and realized you had $3 million sitting in your account, in addition to your retirement savings?
Chances are, that doesn't happen very often. But you might have more (or less) than you assume, which is why it's so important to track your net worth.
The Federal Reserve's 2019 Survey of Consumer Finances reported that the average net worth of American families hit $748,800.
How do you stack up?
What is Net Worth?
Put simply, your net worth totals your liabilities subtracted from the value of all of your assets. It's what you own minus your debt.
Your net worth has nothing to do with the amount of money you make in a year or even 10 years. Instead, it gets down to how much you actually hold in your accounts — the money in your checking and savings accounts, stocks and other securities you own, plus the value of your real estate and anything else of value. You subtract credit card balances, student loans and mortgages from that figure.
Let's discuss net worth, what it is and why you should know it. Let's also walk through the steps to calculate it and how to increase it so you hit all your future goals.
Why Should I Know My Net Worth?
It’s important to track your net worth so you know exactly how much money you have and how much you owe. It's possible to have a negative net worth if you have a lot of liabilities, and in that case, it's really important to put together a game plan to take care of it.
It's also important to consider experts' rules of thumb for how much money you should have the following net worth at different ages:
By age 30: Half your salary invested and saved
By age 40: A net worth of two times your annual salary
By age 50: A net worth of four times your annual salary
By age 60: A net worth of six times your annual salary
This will help you gauge whether you're on track to have the right net worth for you. If you don't know your net worth, it's going to be harder for you to gauge whether you're on the right track to meet your savings, retirement and other goals.
How Do You Calculate Net Worth?
Putting together your net worth means you need to categorize the items that you own and all outstanding debt that you have — anything that you're paying on. However, it's important to remember that if you have a mortgage, you still calculate the market value of your home, which gets added to your net worth.
In other words, let's say you have a house that's worth $200,000. You still owe $100,000 on the mortgage. However, you can still add $100,000 to your net worth.
Use this formula to check your net worth: Assets - Liabilities = Net Worth
Consider all of these types of liabilities when you calculate:
Credit card debt
Home equity loans or home equity lines of credit (HELOCs)
Consider all the things you may own, including the following:
The equity in your home or fully paid off real estate
You may be able to add other things to this list; think carefully about what you owe to creditors and what you own yourself.
Ways to Increase Your Net Worth
If you realize with a jolt that you have a low or negative net worth, you may want to act quickly to increase it. Take a look at the tips below:
Tip 1: Understand your cash flow.
How much money comes in and how much goes out? What's preventing you from growing your net worth if you struggle to build it? Maybe you have expensive hobbies that prevent you from saving. Maybe you're not taking advantage of your employer's 401(k). Whatever it is, determine how well you're handling the everyday cash flow that goes in and out of your account.
Remember, the amount of money you make has no bearing on your net worth. Your net worth can be really low even if you make six figures per year, particularly if you spend most of your income. On the other hand, individuals with modest incomes can actually have a large net worth if they save more money than they spend and limit debt.
Tip 2: Develop a consistent savings and investing strategy.
You want to build up your assets, and one way to approach that involves building up your appreciating assets. Regularly invest in index funds, mutual funds, stocks — whatever type of investment appeals to you the most.
Make sure you consider how you save your liquid assets as well. For example, if you earn less than 0.50% on a savings account, you aren't earning top dollar on your investments. Move your money into a fund that will expose it to more growth. However, if you need to keep the account as liquid as possible, you may want to consider a high-yield savings account, just to earn a smidge higher return on your hard-earned money.
Tip 3: Increase your retirement savings.
You may have several options to increase your retirement savings. If you work for an employer, you may have a 401(k) or Roth 401(k) to invest in. If you're self-employed, maybe you'll add to a Roth IRA, traditional IRA or a Solo 401(k).
Increasing your retirement accounts can help you significantly grow your net worth.
Know Your Net Worth
Most people go on autopilot with their finances. But if you don't know your net worth, how do you know what you're working toward?
One more thing: You can always build your net worth, no matter how far "behind" you think you are. The most important thing you need is awareness of your situation before you can move forward, and that involves some simple addition and subtraction.
Only then can you see how far you've come and how far you still need to go.