Net Worth = Assets (what you own) – Liabilities (what you owe).
Have you ever been lost in the middle of shopping mall? If you’re like me and you refuse to ask for directions, you probably look for one of those stands with a map of the mall, but let’s be honest: those are usually just as hard to find. Anyway, you get there, you look at the map, and you find the store you want to go to, but what must you first figure out? Where are you? To get where you want to go, you must first figure out where you presently are. Knowing where you stand will help you better prepare for your future. That is exactly how net worth works in terms of your journey to financial freedom.
Your net worth is a snapshot of current financial health or condition. You cannot become financially free until you have a handle on where you are and what you are doing right now. Even more, understanding that very simple number will allow you to see the value in not spending hard earned money on yet another item that doesn’t truly add value (i.e. net worth). So how exactly do you figure out yours? It’s very simple. Assets-Liabilities = Net worth.
First, determine the value of your assets. Assets include any retirement accounts, investment accounts, homes, vehicles, and more. If it has true monetary value, you can include it. To some people, this may be the hardest part of the equation. You may have purchased an item at one price, but that was years ago and the value has definitely changed. If possible, try to find or calculate the current market value of your assets.
Next, determine the total amount of your liabilities. Liabilities are your total debt balances. This includes your mortgage, auto loans, student loans, credit card debts, etc. It may be daunting, but get all these numbers together and add them up. Don’t freak out. It can look kind of scary all together, but remember: each debt still has its own due date, interest rate, and minimum payment. You’ll be fine.
Finally, subtract the two numbers. There you have it. That is your total net worth. Note: If you are married, you can do these same calculations to determine the net worth of your total household. Now, you may be asking yourself “What in the world am I supposed to do with this number now?” My answer: Reflect on it.
Create a Goal
Financially speaking, where do you want to be in five years? Ten? Twenty? This is where you need to start. Take a look at your net worth and decide where you would like it to be. According to the Federal Reserve, the average net worth for families in the U.S. under the age of 35 was $76,200 in 2016 (Intuit Inc.). Take a look at these averages based on age to see where you stand. Are you ahead or do you need to start making major moves forward? That answer doesn’t truly matter. Just do what you need to do to get where you want to be.
Remember, your net worth is just a snapshot of your financial health based on your outstanding debts. Sure, it is difficult to save more and spend less when there are so many things we need and want, but the difficulty gets wiped out when you set a real goal. One big motivator is seeing positive results; this is where knowing your net worth can help. Download an app, like Mint, that keeps track of your net worth by tracking all of your accounts, including your retirement accounts. Watching the amount grow due to improved decision will encourage you to make more of those better decisions.
In the meantime, see how we impart this important lesson on our students here. It is never too early, or too late, to start thinking about your net worth. Together, you and your child can understand the importance of net worth and get started on the journey to financial freedom.