This post contains affiliate links, which means we may receive a commission if you click a link and purchase something that we have recommended at no extra cost to you. Recommended products and services are based on my positive experience with them. Please check out our full affiliate disclosure
This post is all about what does net worth mean and why does it matter.
Knowing one’s numbers is so important. The money coming in and going out of your bank account, as well as all of the financial obligations owed to banks and credit card institutions are just as essential as knowing one’s
net worth. Figuring out and tracking one’s net worth is important because it determines one’s personal financial health. But what does net worth mean?
Quick Navigation
What is Net Worth And What Does It Mean Exactly?
Simply put, net worth is what you own minus what you owe.
First, you need to list all of your assets and liabilities. You can do this in an Excel or on a piece of paper in opposite columns from each other. This is the accounting method used widely when looking at a bottom line whether it’s for an individual or business. It’s the best way to assess the financial health of someone or a business.
What Are Assets?
Your assets are things like cash, real estate, investments, items that have monetary value (artwork, jewelry, (vintage) cars, etc.).*
*Certain assets appreciate over the years, so make sure you do your research when you are about to invest. Always consider your ROI with every investment.
What Are Liabilities?
Liabilities are things that are owed such as mortgages, personal loans, taxes, credit card debt, etc. As you list all of your assets in direct opposition to your liabilities you will quickly see whether you have more assets than liabilities or the other way around.
The Basic Formula To Determine Your Net Worth Is To:
Add up all assets and add up all liabilities, then subract the total amount of liabilities from the total amount of assets.
Voila, your end result is your net worth.
Why Is My Net Worth So Low?
When you have a lot of debt and obligations to creditors, your overall net worth can be quite low. You may have to increase your assets on the one side but also continue to decrease your liabilities on the other side.
As you acquire more and more debt, your net worth will decrease more and more. Think abou this, every time you are charging your credit card for an item that you want to purchase (that you don’t really need to purchase!), you are essentially purposely decrease your net worth.
If you stop spending money on stupid things, instead taking your money and investing it in something that actually increases your return, then you are on a better path to actually increase your net worth.
So, as you pay off your debts, your overall net worth should continue to increase over time.
Net Worth By Age – What Net Worth Should You Have By Age?
What should your net worth be depending on your age and stafe of life? This is a questions I asked myself not too long ago as I have been diligently trying to build my networth over the years. I wanted to find out how I compare as to others at my age (in my 30s) and so I embarked on a rabit hole google search.
This is what I found:
According to this article, which said that at age 30, the goal is to have half of your salary in your retirement account. The article then moved on to the financial figure that should be aimed at once you hit 40, and it would be double the amount.
So for example, if you had a salary of 58,000 dollars (before tax) at age 30, you should already have 29,000 dollars saved in your retirement account.
Is this doable and realistic? I am not so sure!
What Can I do To Increase My Net Worth?
There are 3 simple ways to increase your net worth:
- Stop Accumulating Debt
- Pay Down Debt
- Increase Your Income
Stop Accumulating Debt
The one reason why many individuals do not move forward with their net worth is because they simply cannot stop accumulating debt. This means that these individuals cannot stop spending money, mainly more money than they make.
If you find yourself not being able to stop accumulating debt, you’ve got a problem at hand. One way to assist with this is to create a budget for yourself. You need to stop spending more than you make and the very first step is to create a budget and one that’s realistic, please!
Pay Down Debt
The quickest way to financial security and thus an increae in your net worth, is to start paying down debt. If you continue to borrow, you continue to pay the banks interest, which is dead money.
A 10,000 dollar loan at 3% interest per annum means that you are paying 3000 dollars in interest alone to keep that loan. This is 250 dollars a month that could go to something that actually brings you something in return like dividends if you invested only 250 a month.
So start and continue to pay down debt. It is a tideous and long journey but it will catapult you to another level of personal finance and definitely help in increasing your net worth over the long run.
Increase Your Income
There’s only so much you can with your monthly salary and sometimes it is not enough. When it is not enough, it can be a long time before you are able to increase your net worth dramatically.
Even if you’ve assessed your budget to save here and there, the ultimate way to increase your net worth is to increase your income. Increasing your income will enable to you to pay off debt faster but it will also assist in helping you save more for your retirement.
You can ask for a pay rise. If that’s not possible, you can try and take on another job that pays well on the side.
If you are unhappy with your job and pay, you could test the market by sending your resume and applying to a competitior firm thus increasing the chance of being able to negotiate for a higher salary at your new job.
Note: apply before you quit your current job! Never a good idea to quit and then apply to a new job as this puts you at increased risk.
How Your Net Worth Is Positively Affected?
Things That Positively Affect Your Networth
- Save More Money Than You Spend.
- Pay Down Debt Consistently.
- Stop Borrowing Money.
- Create a Budget.
- Get a Second Job.
- Investing – Invest in things like real estate, or companies.
How Your Net Worth Is Negatively Affected?
Things That Negatively Affect Your Networth:
- Ignoring Your Mountain Of Debt.
- Continue To Borrow Money.
- Continue To Spend More Than You Make.
- Not Have Budget In Place.
- Invest In The Wrong Things.
- Not Caring About Your Finances At All.
Does Your Net Worth Really Matter That Much?
It really depends whether your net worth matters to you. Just because financial advisors say that you need to have a certain amount of money saved up by a certain age, doesn’t make it a rule set in stone.
However, your net worth does matter in the sense that if you have a low net worth, less opportunities await. You cannot start investing or building wealth with a low net worth and it is actually important to build savings for retirement and your future in general. A pension from the government is simply not enough with the rate of inflation we are experiencing.
So in essence, yes, net worth should matter but it shouldn’t consume you and shouldn’t make your life miserable just because you are chasing a high net worth.
How To Keep Track Of Your Net Worth?
You can easily keep track of your net worth in Excel. I like Excel because it does the work for you and if you set up a really good net worth tracker, it can be really fun tracking your numbers and you never lose oversight of your numbers!
You should check in every quarter to see how your net worth is doing. You could do it monthly but I find that it a bit exaggerated.
Should I Worry About My Net Worth?
You shouldn’t worry about your net worth. Especially if you are 30 right now and have not had the chance to have half of what you make saved in retirement.
However, by you reading this post, you are being made aware that you could start working on your net worth by simply changing a few habits in your life, one being to create a budget for yourself.
Another being that it is important to pay down your debts, college loans, credit card debt, all this kind of debt.
But you should not be anxious about your net worth if it is not where it could be right now. Just start working on this and set realistic and achievable goals for yourself.
How Do Your Loans Affect Your Net Worth?
Your loans affect your net worth quite a bit. If you have a lot of debt to pay off but not enough income or cash available to do so, this can affect your net worth. Loans like these include: college loans, credit card debts, car loans, pay-day loans.
If you have a mortage, then your net worth is also affected but with a piece of real estate, you also need to look at the value of the home. So even though you might have a mortage, the value of the home could make your net worth actually higher. But this would only be realized at the time of sale of your home as it doesn’t matter otherwise.
Why Is It Important To Be Aware Of Your Net Worth?
It is important to be aware of your net worth because it is your financial lifeline and a good estimator of where you financially should be at a given age. Are these rules set in stone? Definitely not but I am glad I learned about net worth to see where I should be and where I have perhaps fallen behind. It gives me guidance and I can compare myself to the median in society. I also can set myself higher goals to achieve a higher net worth if I really wanted to.
Being aware of one’s net worth is definitely important and should not be ignored along with having a budget and setting financial goals.
Final Note
When we hear net worth, we usually hear of the richest people in the world and their combined net worth. Most people start out with a negative net worth and that is okay, so as long as debts are being paid off and you are also contributing to your retirement savings. Over the course of one’s working years, net worth should increase as income usually increases or financial opportunities await. Ignoring ones’ net worth definitely doesn’t help and it’s important that we know that whenever we spend as little as 1 dollar, we also decrease our overall net worth by 1 dollar.
This post is all about what does net worth mean and why does it matter.