Know Your Worth! Net Worth, That Is

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Do you know your net worth? A lot of people don’t, yet I think it is one of the most important numbers you can understand about yourself. Don’t you want to know if you’re a millionaire or not?

I’m kidding a little, but it is true that there is this misconception about when one can actually designate themselves a millionaire.

It seems a lot of people think it’s how much money you have. Others believe it’s tied to how big your salary is. These are both incorrect, at least by themselves.

You’ve truly reached millionaire status when your net worth is over a million! If your goal is to be a millionaire, it might be important to know what factors will actually determine whether you are one or not.

I’m going to tell you how to calculate your net worth and why it’s important to your long-term wealth goals.

How To Calculate Your Net Worth

This is pretty simple and takes only a few minutes to calculate. You need to calculate your assets minus your liabilities.

Assets are your cash, stocks, retirement accounts, house, and you can throw in vehicles, RV’s, valuable jewelry, etc. if you want to dive that deep into it.

I do include the depreciable assets like cars and RV’s because they still have a value, and you could receive a good chunk of money if you were to sell them.

How you should be listing these on your personal financial statement is at their current market, or liquidation, value. For a house, you could go to any house selling site and get a ballpark value for your home. You only listing the full value of your home, don’t include any debts against it in this part.

As I said above about the cars, what is it you think you can reasonably get if you were to try to sell your car today? That would be it’s value.

As an FYI, for lending purposes, most lenders would exclude depreciable assets and personal property from your net worth.

Liabilities are anything you owe, i.e. credit card balances, car loans, student loans, mortgage, etc. HELOC’s, of course, are also house debts, and you would list the amount as whatever the current balance is, not the full limit.

If you have any personal loans, or owe taxes, these are also liabilities. This should be pretty simple to add up if you already have a good handle on your debt situation.

You then subtract the liabilities from the assets and there you have it! It’s your net worth. Here is an example of what this would look like:

What Does This Tell You

Your net worth includes your assets and liabilities, which gives a more complete picture of your financial success.

Say, it equals around $500,000- You could say you’re a “half millionaire”, ha ha!

But let’s talk about an example of your friend who keeps trying to convince that he’s rich.

Your friend who makes $100K, bought a $700K house because he can “afford payments”, and has no savings or retirement. He has a good salary, nice home, goes to Vegas frequently, and always buys the expensive alcohol! He’s successful, right?

If he admits that he has $630K in mortgage debt and $80K of student loan debt, he actually has a negative net worth. He’s $10K in the red. That’s not even including all the loans for other toys he has, or any credit card debt.

If you calculate a negative net worth, you are not wealthy. It means you’re under water.

I don’t care if you have a million dollar home. If you also have debts that are a $1,050,000, you are not a millionaire!

Why Knowing Your Net Worth Is Important

The average net worth for millennials is $8,000! That might be good for someone just out of college, but this average was from a sample from 20-35 year-olds!

If your goal is to one day become a millionaire, whether it’s for financial security or leaving a legacy, knowing what makes up your net worth will help you get there. Check out this post from Financial Alien to see a further break down of net worth by age group.

Knowing your net worth number helps you define your financial goals, and gets you to focus on the right things in order to build wealth.

Some people are only focused on accumulating things. Others are focused on retirement accounts. Others are focused on making more money. These can all be factors in long term wealth building, but you’ll find yourself struggling or treading water if you’re only focusing on these individual things.

For instance, when you were focused on paying off all your debt, your goal was to get to zero. That’s an easy goal to visualize. For me, I had to work to shift the gears in my mind to make a new financial goal that involved numbers going UP!

It’s a mindset shift from watching something go down (your debt) to aiming to make something go up (your assets/net worth).

How Often You Should Check Your Net Worth

I joke about how often I check my net worth (because it is a lot), but I feel justified doing it.

My feeling is that I wouldn’t only check my budget once a year, once a quarter, and not even just once a week! While it’s not necessary to update it that often, I think that at least checking it somewhat frequently- especially while you’re paying off debt- can be very motivating.

Now that I don’t have debt (besides the mortgage), it takes more to see that net worth number grow. It’s more motivating for me to save or invest more to keep the same kind of momentum as when I was paying off debt!

Think of it as your grade on your financial report card. It’s a measure of your financial health. You should at least be checking it regularly.

Closing Thoughts

Knowing your net worth tells you what levers to pull to improve it.

Maybe your debt is holding back your net worth, so you’ll be focused on paying that down.

You might decide you need to increase your assets, possibly by investing more.

These are all positive actions that will provide you financial security, and help you grow your net worth. Tracking your net worth is going to motivate you to do these things, which is why it’s so important.

RELATED

See this post about paying off debt fast

Learn how to budget so you can grow your net worth!

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