Have you ever gotten lost inside a huge shopping mall? You take a left turn when you should have gone right and end up in the food court instead of Macy’s. After walking around aimlessly for a few minutes, you finally find a directory and see a small label with three beautiful words that read: "You are here."
Sometimes we could use a sign like that with our finances, couldn’t we? All of us get a little lost from time to time. We need something to remind us where we are so we can get where we want to go. Your net worth is one of the best ways to see where you stand financially. That number essentially says, "You are here," and it can help you get back on track with wealth-building.
So, do you know your net worth? U
The good news is, figuring out your net worth isn’t rocket science—it’s a simple formula! You just need to spend the time it takes getting the information you need to run the numbers.
What Your Net Worth Is—And What It Isn’t
Your net worth is what you own minus what you owe. It’s the total value of everything you own—including your house, cars, investments, and cash—minus your liabilities (debts).
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We just made it easier for you to find that number with our net-worth calculator. By answering a few simple questions, you can find out your net worth in five minutes; that’s less time than it takes to get your morning coffee!
But before we go any further, let's bust some myths and misconceptions people have about net worth.
First of all, your net worth isn’t just the stuff you have. You could have a million dollars in cash and investments, but if you also have a million dollars tied up in mortgages, credit card debt and student loans, you’re not a millionaire—you’re broke!
And second, just because someone has a high income doesn’t mean they have a high net worth. Your net worth is not your income!
There’s a lie in our culture that says you have to earn a large income in order to build wealth. That’s simply not true. A six-figure salary might help, but it doesn’t necessarily lead to a high net worth. What’s important is what you do with your salary.
The Ramsey Solutions research team recently completed the largest, most comprehensive research study of millionaires in history. We talked to more than 10,000 millionaires—remember, that means their net worth is at least $1 million—to find out what a real millionaire looks like. What we found might surprise you.
Here’s a hint: It doesn’t matter what your income is, what your career is, or what kind of degree you have—anyone can become a millionaire over time.
How to Calculate Your Net Worth
Meet Joe. Joe’s been doing his own thing for a while, but he wakes up one day and realizes he’s completely lost. He has no clue where he stands financially! He decides he wants to get a better handle on his finances. The first step is to figure out where he is; he needs to know his net worth.
Just like Joe, you can calculate net worth in three easy steps.
Step 1: Add Up Your Assets (What You Own)
Again, your assets include the stuff you own that has monetary value attached to them.
There are two types of assets: liquid and illiquid. A liquid asset is basically cash that’s easily available to you, like money in a money market account. An illiquid asset, on the other hand, can’t be converted to cash quickly. That would be something like a piece of land or a car. Both types of assets are part of your net-worth equation.
The first step to figuring out your net worth is to make a list of what you own. Here are some of the things in your life that qualify as assets:
- Cash: savings and checking accounts
- Retirement accounts and other investments: 401(k), 403(b), and IRAs
- Real estate: home equity and rental properties
- Vehicles: cars, trucks, and boats
- Contents of your home: jewelry, art, collector’s items, etc.
So, let’s take a look at Joe’s assets. Remember, this is what he owns:
- Home valued at $210,000
- 401(k) with $60,000
- Car worth $15,000
- Savings account balance of $7,000
- Checking account balance of $2,000
When he adds up the value of these items, Joe learns he has $294,000 in total assets.
Step 2: Add Up Your Liabilities (What You Owe)
Here comes the not-so-fun part: adding up all your liabilities. These are all the debts and outstanding payments you haven’t eliminated. Hopefully, all your debts equal zero. But if that’s not the case, it’s time to get them all down on paper.
Here are some of the most common forms of consumer debt:
- Credit cards
- Student loans
- Car loans
- Medical bills
Joe has been piling up some debt over the years. Here’s what he owes:
- Credit card debt totaling $12,000
- Student loan debt of $35,000
- Mortgage balance of $175,000
- Car loan of $10,000
- Medical bills equaling $1,000
That might have been a little painful. He listed all of his liabilities, which add up to $233,000.
Now Joe’s ready for the final step.
Step 3: Subtract Your Liabilities From Your Assets
You know the total value of your assets and how much debt you’ve accumulated. Now all you have to do is subtract! Here’s the formula:
- Total Liabilities
Joe subtracts his liabilities from his assets to get his total net worth, and he sees that his current net worth is $61,000.
- $233,000 (Liabilities)
$61,000 (Net Worth)
3 Reasons You Need to Know Your Net Worth
Let’s also unpack why it’s so important to know what your net worth is and how you can use it to propel you toward your financial goals.
1. Your Net Worth Shows Where You Are
Are you saving enough for retirement? Do you have money in your savings account to cover an emergency? What debts do you need to tackle? Your net worth can help you answer these questions. It gives you a clear picture of your current situation.
You may not like where you stand, and that’s okay. If you’re lagging behind in your wealth-building, you can still turn things around. You’re never out of the game unless you quit. Don’t quit; push forward. Stay focused, keep your eye on the next goal in front of you, and find ways to make progress.
2. Your Net Worth Shows What Needs to Be Fixed
Ideally, you want your debts to equal a big, fat zero. But if you do have debt, finding your net worth forces you to see what you’re up against. You can’t fix a problem you haven’t identified.
To say goodbye to debt, use the debt snowball method. List your debts from smallest to largest, and tackle them as quickly as possible. Getting rid of your debt won’t just free up your income; it’ll also raise your net worth!
You might need to get rid of the truck or sell some stuff. Do whatever it takes to get debt out of your life!
If you’ve gotten rid of all your debt except for your mortgage, you’re doing an awesome job. But don’t take your foot off the gas now! Can you make a few extra mortgage payments each year to pay off your house even faster? Imagine how much you could invest for the future with no debt and no more house payments!
Take the Next Step With a Financial Advisor
Knowing your net worth is important, but you shouldn’t stop there. The steps you take after calculating your net worth are just as important. A financial advisor can help you make decisions so you feel confident about your retirement.
If you need help finding an investing pro, check out SmartVestor. You’ll be connected with investing professionals in your area who are ready to help you work toward your retirement goals.