Friday, February 21, 2020

What Even is 'Net Worth'?

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Once you start diving into your finances, saving money, and planning for retirement, the idea of 'net worth' comes up a lot.  A lot of 20-somethings have a negative net worth, while a lot of 40-somethings have a positive one.  But what does that even mean and how can you know where you stand?

What is Net Worth?

Net worth is calculated as your assets minus your liabilities.  What you own minus what you owe.  Simple enough right?  Say your house is worth $300,000.  That's an asset you own, so your net worth is $300,000.  If you still have a mortgage on it though for say $200,000, your net worth becomes $100,000.  The home (asset) minus the mortgage (liability), or $300,000 - $200,000 = $100,000.  Assets are anything valuable, so your home, car, investment accounts, cash in the bank, expensive jewelry or even artwork are all considered assets.  Liabilities, then, are the debt you own on those things like your mortgage, car loan, student loans, personal loans or credit card debt.

What Should Your Net Worth Be?

A lot of people in their early twenties have a negative net worth.  They don't own much and just graduated with student loan debt, so it's pretty common at that age to be in the negatives.  As you get older, you want your net worth to be a higher and higher positive number, because that's how you get to retire and give generously.  What it 'should' be is any positive number, but of course that number depends on your age and retirement goals.  Don't worry, I'll have a whole other post on calculating how much you need to retire and when.

That said, there are very common milestone numbers that are thrown around on the internet.  None of them are set in stone since everyone's financial journey is quite different, but I know that it can be nice to have a benchmark to compare to, just to see if you're in the ballpark.  The most recent data is from 2016, which you can see here.  The average per age group is quite a bit higher than the median, since a few high net worth individuals can really pull that average number up.  In general, the guideline is to have a positive net worth in the amount of your yearly salary by 30, two to three times your yearly salary by 40, and four to five times your yearly salary by 50.  

Ways to Calculate Your Net Worth

Am I the only one who thinks it's fun to track?  But really, you should know where you stand financially.  The first step is always awareness.  Even if it's negative, because that's the number you use as a benchmark to make goals and track progress.  It's the same as losing weight, if you ever watched Biggest Loser - you have to get on the scale.  You have to know your numbers or you won't know where you need to go from here.  

I use Personal Capital, because I like how it links with all my various accounts (my bank is different from my Roth IRA which is different from my 401k etc., etc.)  It's free to use and does all the calculations automatically, including letting you know if you're on track with retirement goals.  If you want to do it manually, you can also download a free excel spreadsheet to calculate the numbers yourself.

Increase Your Net Worth

If you're not as on track as you'd like to be, you need to increase your net worth.  The way you increase your net worth is by paying off debt.  Any money you still owe is just bringing you down, so get intense and pay off any debt as fast as possible by making the sacrifices now so you don't have to for the rest of your life, well into retirement.

It's possible that you paid off debt and now need to work a little harder to get that net worth higher again.  And of course the way to do that is make and save more money.  That could require a side hustle or career change, or it could just mean cutting expenses like eating out and cable.  When you stop shopping so much, you see how quickly that number in your savings will rise.  Being able to invest that money will only benefit you in the long run.  Set some numbers goals for yourself to really push your savings and investments to the next level.

Do you track your net worth?  Do you feel positive about it and like you're heading in the right direction?

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