You may have heard of the term “net worth” and figured it refers to a person or an entity’s wealth without fully understanding exactly what it means. But don’t worry. That’s what we’re going to explore in this article.
By the end of today, you’ll be able to answer the questions of, “What is net worth?” and “What does it mean for your finances?”
Simply put, net worth is the value of everything you own minus what you owe. It’s also a great metric for determining a person’s financial health, which we’ll also cover in this article. Ready to learn what your net worth is and how you can boost it? Keep scrolling!
How to calculate net worth
Calculating your net worth can be simple. All you have to do is figure out your liabilities vs assets. That might sound more complicated than it really is, but to keep it simple, your assets are things like your home, car, and other valuables like jewelry, art, and antiques.
If you own a business, the total value and the percentage of the company that you own will contribute towards your net worth. Liabilities are what you owe, like your mortgage or credit card debt, so those will be deducted from your net worth. But below, you’ll find a list of the most common types of assets and liabilities.
|Real Estate Market Value||Mortgage|
|Checking Accounts||Credit Card Debt|
|Savings Accounts||Personal Loans|
|Retirement Accounts||Students Loans|
|Mutual Funds||Overdue bills|
How to build net worth
It might seem like the more you’re paid for your job, the more you’re building wealth and the higher your net worth will be. That isn’t always the case! Some people’s jobs require them to accrue hefty debt, like doctors who have massive student loans they took out for med school.
People who make more money also tend to spend more of it, like celebrities who have enormous mortgages on their multi-million dollar homes. You can have a sizable salary, but if you’re a big spender or have a wad of debt to your name, your net worth is probably not at its best.
On the other hand, if you have a modest salary but you’re a thrifty shopper and passionate about saving, your net worth is likely to be in good shape. That’s what’s great about net worth: whether you’re starting with a little or a lot, the same strategies can help you build up wealth. Read on to learn about some of the most important steps you can take to build wealth.
Form a savings plan
This tip is something people know in the back of their heads but often don’t act on, or at the very least, don’t take it seriously enough. Actively doing your best to save money to tuck away is one of the fundamental strategies for boosting your net worth.
Having a budget makes saving money easier. Your budget should take into account exactly how much money you have coming in, how much you’re spending and what your goal is for how much you’d like to reduce that amount, and the maximum you can have leftover for savings after the money comes in and goes out each month.
That may seem like a daunting task. The good news is, nowadays there are many banks and budget apps that can help you track your spending habits. Getting a handle on your financial picture is easy when you have a financial dashboard to refer to.
The best dashboards give you a sense of your cash flow, credit status, and savings, empowering you to reach your goals. Once you know how much you’re spending each month, it’s time to start cutting off unnecessary expenses and redirecting that money towards savings.
Setting up a savings account with a traditional bank is one of the oldest and most certain ways to keep your money safe. But if you want to see higher long-term gains, you’re better off opening an investment account.
An investment account that offers auto invest automatically transfers money from your bank account into an investment portfolio regularly. You can choose how large and how frequently you want the deposits to be. Long-term investing gives you the best chance at profiting and reinvesting those profits until you build up wealth.
Being a homeowner is more beneficial to your net worth than renting. That home can eventually be counted among your assets, whereas rent is simply money out the door.
Paying your mortgage on time helps build up your credit score, which then helps you apply for other loans, mortgages, credit cards, and more.
Pay off your debt
Loans come with high interest rates, and the longer it takes you to pay the loan back, the more money you’ll lose to interest. If you have a ton of credit card debt, consider refinancing to a lower APR.
If student loans are holding you down, look into qualifying for student loan forgiveness or other relief programs. If you have an auto loan, try refocusing your budget to chip away at that as quickly as you can so you aren’t losing extra money to the interest fees.
Boost your net worth and your financial health
Knowing your net worth helps you figure out your financial stability. It also makes you more aware of where you’re losing money, which makes you a more conscious budgeter. Tracking your net worth over time can also help you keep an eye on your financial health and how it’s progressed.
Is net worth actual money?
Net worth is the calculation of your assets vs. liabilities. Your net worth is different from the number you see in your bank account. You would need to sell your assets to have actual money to spend.
How do you figure out your net worth?
You can figure out your net worth by calculating the value of all of your assets and all of your liabilities, then subtracting your liabilities from your assets.
What is a good net worth?
The median net worth for all Americans is $121,760. However, your net worth will depend on things like your age and your family history. To considered themselves wealthy, Millennials said they’d need a $1.4 million net worth; Baby Boomers said they’d need $2.5 million to feel like they’d hit the mark.