The most recent census data shows a median household net worth of $80,039. If you take real estate out of the equation, the number drops to $25,116.
If you are scratching your head wondering what these figures mean or why they even matter, you aren’t alone.
A simple definition of net worth is: the value of the things you own. “Net” simply refers to the fact that you need to subtract the amount you owe others. Therefore, your net worth is the value of everything you own once you deduct your loans, mortgages and other debts.
Why Does Your Net Worth Matter? Your net worth matters because it is a summary of your financial decisions and habits. A financial report card.
Throughout our lives, we grow accustomed to teachers and professors summarizing months of school into a simple letter grade, which contributes to a GPA. A 4.0 grade point average doesn’t always mean that the student worked hard. We all know the person who never studied and seemed to ace all of the tests effortlessly. But in general, good grades are positively correlated with effort, grit and discipline.
Your net worth can be thought of the same way. A high net worth doesn’t necessarily mean you’ve put a lot of effort into making good financial decisions, but the numbers often point to the truth.
If you’ve earned $65,000 a year for the past decade but only have a net worth of $10,000, it begs a lot of questions. Namely, where did the other $640,000 go? If it went to pay for unexpected medical emergencies, that might be a good reason. Going out on the town, driving fancy cars, and wearing designer clothes, not so much.
What’s A “Good” Net Worth Number?
Naturally when discussing a benchmark, you wonder what a good number looks like. Your net worth needs to be looked at in the context of your financial goals. If you have plans to pay for your kids’ college educations, then clearly you need to amass assets more aggressively given the outrageous increase of college costs.
If you are looking for a hard and fast rule, simply take the number of years since you entered the work force or graduated from college, multiply it by your average salary during those years, and multiply by 0.25.
Net Worth Target = Years Working X Average Gross Income X 0.25
Let's put that formula to practice. If you are 30 years old, have worked for 8 years, and had an average salary of $55,000, ideally you should have a net worth of $110,000.
If your net worth isn’t close to where it needs to be, that’s okay. It just means that you need to reduce your debt, increase your income, and save more of your money.
The easiest way to increase your savings rate is to create a monthly budget. Here is a helpful guide to building an awesome budget.
How To Calculate Your Net Worth. If you want to calculate it by hand, simply grab a piece of paper and draw a vertical line down the middle. Make a list of the things you own on the left, and a list of your loans and other debts on the right. To get your net worth number, take the sum of your assets (left column) and subtract it by the sum of your liabilities (the right column).
The easiest way to calculate your net worth is to use my net worth calculator.
Here are the main items you want to consider in your calculations:
Financial Assets
- Cash, checking and savings accounts
- Retirement accounts (401Ks, Roth IRAs, etc.)
- Other Investment Accounts (stocks, mutual funds, 529 Plans, etc.)
- Market value of real estate
- Ownership stake in business or profession
Financial Liabilities
- Real estate mortgages
- Outstanding loans (student, personal, home equity, car, etc.)
- Credit card balances
- Other outstanding bills (property taxes, hospital bills, etc.)
If you own a home, it’s likely your most valuable asset (and liability). For this reason, it’s important to make sure you have an accurate sense of it’s current market value.
According to Bernard Klein, Co-Founder of NYC-based real estate and advisory firm Blooming Sky, estimating home values is as much an art as it is a science. Klein says,
A home is ultimately worth whatever a buyer is willing to pay for it. However, short of listing your home for sale, there are numerous shortcuts a home owner can take. Try going to Zillow and checking out the Zestimate. If you are looking at what you might be able to sell your home for, work with a local broker to come up with a price based on prior sales of comparable properties, also known as comps. If you are looking to use your home's equity to refinance or take out a loan, your lender will call for an appraisal, which will also help provide you with an understanding of your home's value.
What about my cars and furniture? I paid a lot for those! The reason I don’t include either of those purchases is because, in general, they depreciate and lose value quickly. There are exceptions to every rule, so feel free to include your vehicle if you wish, but it’s not a financial investment you can expect to hold value long-term.
What about life insurance and inheritances? If you have a cash value life insurance policy, you can add the cash value of the policy to your assets, otherwise don’t include your policy. Do not include an inheritance, regardless of how certain you think it is. Until you receive it, it’s not yours.
Buying An Expensive House And Driving Nice Cars Doesn’t Mean You Have A High Net Worth. In May, Mike Meru, a Utah-based dentist, rose to internet fame for having accumulated over $1 million in student loans. Meanwhile, he and his wife have purchased a $500,000 home. Their cars of choice? A Tesla and Mercedes.
Considering his annual salary of $225,000 and his 6 years working, he should have a net worth of $338,000. Once you take his $1 million of student loans, his mortgage, and car loans into account, it’s clear he is isn’t close to where he should be.
If you're behind your net worth goal, it might be a sign that your relationship with money is broken. Now is the time to make important changes. Focus on reducing your debt, increasing your income, and investing more of your money. Write down your net worth goal and track it regularly so that it can motivate you.
Remember, your net worth is simply a number that reflects your financial choices. Are you receiving a passing grade?
