Net worth: The most important number in personal finance?

Do you know your net worth?

Your net worth is a snapshot of your financial life at one moment in time, a single number representing your financial health. It's the total of everything you've earned and spent until today. In The Wall Street Journal Complete Personal Finance Guidebook, Jeff Opdyke writes:

Knowing your net worth is important…if only for one reason: It forces you to interact with your financial life, keeping you in touch with your money and knowledgeable about where you are on the road to where you think you're going.

Computing net worth is an academic exercise for some, with little impact on the way they deal with money. For others, it's a powerful motivator. In a guest post here last March, FrugalTrader described how his net worth went from $-40,000 to $285,000 in five years. He aims to increase this to $1 million by 2015. FrugalTrader's net worth guides his financial decisions.

Calculating Net Worth

Net worth is easy to calculate: It's simply the difference between your assets (the things you own) and your liabilities (the things you owe).

 

If, for example, you're just leaving home, you might have $2000 in the bank, but owe your cousin Harry $500. Your net worth would be $1500. On the other hand, if you only had $500 in the bank, but owed your cousin Harry $4000, your net worth would be -$3500.

In real life, the calculation can be more complex. Most people have a variety of assets and liabilities, some of which aren't straight-forward. (Exactly how much is your home worth, anyhow? That antique desk you inherited from your great-aunt Mabel?) If you need help listing your assets and liabilities, you can download a net worth worksheet [PDF] from The Quiet Millionaire.

Most personal finance software will compute your net worth, too. Quicken, for example, always shows my net worth (or what it believes to be my net worth) below my list of accounts. There are also many net worth calculators online.

Tracking Net Worth

After you've calculated your net worth, what can you do with it? Like FrugalTrader, you can use net worth to guide your future. Begin by tracking it systematically with a spreadsheet, or with a web-based tool like NetworthIQ.

Whichever method you choose to track your net worth, consider the following:

  • Compute your net worth yearly. Changes to your net worth are only really meaningful over the long term. From month to month, a variety of factor can cause your net worth to fluctuate. An annual checkup is frequent enough to catch problems and to be sure you're still on course to meet your goals. (Quarterly checks would probably work, too.)
  • Don't compare yourself to other individuals. It's fine to compare your net worth to other groups of people (all 30-35 year olds, for example), but it can be dangerous to begin comparing net worths with your friends. That can lead to lifestyle inflation, the need to “keep up with the Joneses”.
  • Establish a system of measurement and stick to it. If you're married (or have a long-term partner), will you track your combined net worth, or just your own? What does that mean for shared possessions, like a house? And how do you measure the value of your home, anyhow? List what you paid for it? Take a guess as to the market value? Use the tax assessment? It matters less which answers you choose to these questions, and more that you choose the same answers from one year to the next.

According to The Federal Reserve Board's 2004 Survey of Consumer Finances [PDF], the median net worth for U.S. families is $93,100. If you dig through this survey, you can also find comparisons based on age, education, income, and more. (On average, college graduates earn nearly twice the income of high school graduates — and they have more than three times the net worth.)

Using Net Worth

“[Your net worth] is what you currently have to show for your lifetime income; the rest is memories and illusions,” write Joe Dominguez and Vicki Robin in the classic Your Money or Your Life. But they caution not to attach too much significance to the number: “Whatever you find, it's important to remember that net worth does not equal self worth.

Net worth might not seem relevant if you're still working, but it will probably figure prominently in your retirement. Unless you can generate enough income from other sources (Social Security, pension plans), you'll eventually need to draw on the components of your net worth for living expenses.

That is, you'll need to sell that antique desk from great-aunt Mabel, or your sailboat, or even your home. All the parts of your net worth contribute to your total wealth.

Photo by David Hobby of the great photography blog, Strobist.

More about...Administration

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
50 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Stacy
Stacy
12 years ago

The only thing I don’t like about evaluating your net worth is the value that is placed on possessions, not experiences. Our two week family trip to Ireland has a negative impact on our net worth, but if I used that same amount of money to buy stuff I don’t need, but has value because I could sell it, that increases my net value. I would take that trip over owning more stuff to dust anytime. I could have saved that money for retirement, adding to my assets, but as long as I am already saving my budgeted amount for… Read more »

J.D.
J.D.
12 years ago

Good point, Stacy. Net worth cannot capture the value of education, either. Though those with higher educations tend to have higher net worths later in life, paying for college actually decreases net worth when we’re young. Net worth simply isn’t capable of capturing these “intangibles”.

Andrea
Andrea
12 years ago

Many years ago, I took a 4 month leave of absence from a good paying job and traveled(backpacked) 4 months in Asia. It changed my life. At the time, most people I knew(in pursuit of the all-mighty dollar) said “but you are losing 4 months of salary and spending all that money”. I would never have traded that experience for the money it cost- and an experience that I could not duplicate now- for age, geopolitical and financial reasons. On the title topic- we do know our net worth-and recently had it evaluated by a financial planner and tax advisor… Read more »

Kristen a.k.a. The Frugal Girl
Kristen a.k.a. The Frugal Girl
12 years ago

I have a vague idea of our net worth but haven’t been keeping that close of an eye on it. I should probably, though, now that we’re making some progress on saving, as I think it would be motivating!

JB
JB
12 years ago

I like to look at my household as a business and I love doing a net worth statement on the 1st of every month. Just like a business would do a balance sheet statement, a household should do a net worth statement to make sure they are moving in the right direction and making good decisions.

Erik Lang
Erik Lang
12 years ago

I agree that calculating your net worth is important, but i alway find it difficult figuring out what to include. I realize all debt should be included (Mort., credit cards, student loans) and assests like 401k, savings as well as equity in your house. But what about cars that constantly go down in price or other items like your new tv or laptop computer. they have value but only at a fraction of what you paid for them. I personally just try and keep it simple and constant.

Mo Money
Mo Money
12 years ago

Net worth will also have an impact on your spending. Should you buy that new car that will depreciate the minute you drive it off the lot! Should you pay off the credit card or put the windfall you received into savings. Net result to net worth in this case is the same. Use it as a roadmap to see were you are now and were you want to be in the future.

jb
jb
12 years ago

Adding onto what Erik said, the flaws in the net worth calculation are:

* Cars (and other depreciating assets) that will likely never translate to cash you get back.
* Your home, which for many is an asset plan not to translate to cash within your lifetime.
* Assets where you pay different types of taxes when you sell. ($1k in a 401k is not equal to $1k in Roth IRA because you still have to pay taxes on 401k withdrawals).

Randy
Randy
12 years ago

Your car(s) and home(s) are assets and should be counted. For cars the blue book rating is a good valuation of fair market value. I use the trade-in value in my calculations. For homes zillow.com will give an estimate. Zillow is a starting place, I adjust the figure it returns.

Any other asset I count if its value is $1,000 or more and has a market (e.g., collectables, fine art, jewelry). If the asset is worth insuring then it counts.

Megan
Megan
12 years ago

I don’t think comparing net worth with other individuals is necessarily bad. Yes, it encourages some variant of “keeping up with the Joneses”, but I think it does so in reverse of how that phrase is usually meant. My boyfriend and I compare net worths and it pushes us to spend less and save more to increase our net worths. I think that’s a good way to be “keeping up” with others. In response to Mo Money (comment #7), deciding between using a windfall for savings or debt repayment may not be a wash for your net worth. It depends… Read more »

Chris
Chris
12 years ago

I see everyone’s point in the flaws of net worth, but I personally find it an exceptionally valuable tool. I set my goal for the year based on net worth and then build my “goal budget” based off of that. As was harped in the first couple of comments, it should be experience not money that has value, but using the net worth as a guidline for building / maintaining a budget you can see what events / experiences will fit into the plan and which ones could throw you way off base. As far as home / car value:… Read more »

Hank
Hank
12 years ago

I include my cars in the calculation of net worth. I re-evaluate their resale value with Kelly Blue Book every couple of months. Consistency is the most important thing in the calculation in order to be able to judge where you were and where you are going.

And…a dollar is a dollar and an asset no matter what the tax implications are.

jtimberman
jtimberman
12 years ago

Great post JD! Knowing net worth is *very* important. For people in debt, tracking net worth can give them hope as they pay off debt and their net worth goes up. For people who are not in debt, it is good encouragement on the progress they’re making. Our net worth is probably slightly positive, but that is very much dependent on what our house would sell for, which isn’t likely to be much more than we paid at this point. I have some money saved in an IRA from a 401K rollover, but it probably makes up the loss on… Read more »

MillionDollarJourney
MillionDollarJourney
12 years ago

Hey J.D, thanks for mentioning the guest post.

To me, calculating and tracking net worth is essential because it gives you the big picture on your financial health. It really does guide how I spend my money where spend more freely on appreciating assets and a bit more frugal on non life enhancing and depreciating consumer items.

Steve
Steve
12 years ago

I agree on the importance of knowing your net worth. I also think that in many cases it is counterproductive to track it monthly. I had a post to that affect last week. A notable exception though and a case where it is useful to track the number monthly would be for people eliminating debt, where gains are both noticeable and motivating from month to month.

JT
JT
12 years ago

I really agree that taking a snapshot of your net worth is a great way to figure out where you are compared with where you are going. It’s great to set financial goals, but if you don’t know your starting point, and waypoints, they are hard to achieve. I’ve decided to do a recalc every 6 months.

I wrote about it on my blog last month – http://www.smalltownfinance.com.

WiseMoneyMatters
WiseMoneyMatters
12 years ago

I somewhat disagree with Net Worth being the best financial number. For instance, some of your Net Worth can be in real estate. In the current market, it can be very hard to turn real estate net worth into liquid money. Secondly, you may have some Net Worth in things like a Roth IRA or a 401K plan. Unless you are at the age where you can liquidate those funds, you are looking at a hefty tax fee if you do. Thus taking those at their full value isn’t truly accurate. The number I like to use is something a… Read more »

Jenna
Jenna
12 years ago

I tend to use the Assets vs. liabilities chart from Rich Dad, Poor Dad, rather than a net worth chart. I do this because I believe it gives me a clearer picture of my finances. Just because I own several thousand dollars worth of material goods does not mean that I could sell them at that price, even if I wanted to. The assets vs. Liabilities sheet though, that factors in all the important stuff – what’s making you money vs. what’s costing you money. I’ve found that I actually work harder towards building my financial foundation when I look… Read more »

Dylan
Dylan
12 years ago

Until someone comes up with some type of universally accepted “financial health index.” Net worth is just a number that, when taken out of context, is just a number. Similar to using weight as an indicator of personal health, without information such as height, age, gender, and other details, it tells you very little on it owns.

In other words, someone with a net worth of $20,000 could be in a lot better financial health than someone worth $2,000,0000.

It’s still worth knowing, like your weight, but you should consider other financial measures when determining overall condition.

Adrienne
Adrienne
12 years ago

I think millionaire next door had a calculation of where your net worth should be. If I remember correctly it was age/10*yearly income. (this was for average savers) The problem I had for this was it doesn’t work for young people. In response to people’s issue with cars the way I track mine is using kelly blue book to find what I could actually sell it for now (not what I once paid). I also don’t count the $ in my 529 accounts (since that money is already spent in my mind). I keep track of a few numbers that… Read more »

betsy - MoneyChangesThings.blogspot.com
betsy - MoneyChangesThings.blogspot.com
12 years ago

There’s a study that shows that people with a financial plan do better than those without one. It sounds like a joke, but there really is data on this. Getting the numbers together for a NW statement moves people from denial to reality, I suppose.
I couldn’t find the article online, but input it last year.
http://moneychangesthings.blogspot.com/search?q=net+worth

J.D.
J.D.
12 years ago

Good one, Adrienne. I’d forgotten about The Millionaire Next Door and its measurements of wealth. Here’s a quote from the book: Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide it by ten. This, less any inherited wealth, is what your net worth should be. In other words, if you and your partner are both 40 years old, and you earn a combined $100,000 a year, you should have a net worth of $400,000. Though I believe this oversimplifies things (and puts me into a panic because my net worth isn’t anywhere close… Read more »

Adam
Adam
12 years ago

That doesn’t make much sense. You shouldn’t multiply by your age, you should multiply by your working age. This formula assumes you started working when you were born.

Paul
Paul
12 years ago

Be very careful using the charts from Rich Dad. They are based on some incorrect assumptions and definitions. How long you can survive without a job is a measure of financial independence, not wealth. There’s a difference, and it’s important. I do like the idea of using both measurements. I really DON’T like the your net worth ‘should’ be idea. Your net worth should be what you need to reach your goals, whatever they may be. If your goal is to retire at 55, your net worth at 40 shouldn’t be the same as someone at 40 who is already… Read more »

ThatGuy
ThatGuy
12 years ago

I think net worth has to be calculated based on age, where if you are under 59.5 you should not count the money you have in your retirement accounts, even though you can draw it down for first time home buyers and other reasons. Granted this may have a perverse affect on making you contribute less to your 401k, because it doesn’t affect your net worth. For cars I think a better system is to check Kelley Blue Book and then start depreciating by some amount. In my case my car was worth about 5k and I started to depreciate… Read more »

Daria
Daria
12 years ago

Adam, that’s an interesting way to think of it. I know for me that number doesn’t work at all because I went to law school (so no years of income for three years), then started at a high annual income. It’s impossible that I would have the “proper” net worth in Millionaire Next Door right away.

Nicole
Nicole
12 years ago

I calculate my NW every couple of months using an excel spreadsheet I downloaded from a PF blog. It’s nice to see the NW numbers go up and makes me feel that I’m going in the right direction. I find it helps me to stay on track, although my budget/expense spreadsheet, which I use daily, helps even more. I am a renter right now and I don’t own a car (I live in Manhattan and don’t need one). Once I buy a house, I will include that in my calculation obviously, but I don’t include any other tangible assets. I… Read more »

quinsy
quinsy
12 years ago

This calculation of net worth stuff always just makes me laugh. So I have $180,000 in medical school debt, and I also own a condo, mortgage $230,000.

By the calculation of Mr. Rich Dad, I should have net worth of $270,000. Instead it’s probably more like -$270,000 (calculating the actual number would be pretty depressing). Hoping for a net worth of zero some wonderful day years from now is a little less motivating, I guess.

Nicole
Nicole
12 years ago

Daria – I am in the same situation as you. I read the Millionaire Next Door a couple of years out of law school and thought – well that calculation really doesn’t apply to me. Particularly, since I went to law school “later in life” – i.e. late 30s, and my post-law school income was triple my pre-law school income.

Jenna
Jenna
12 years ago

Actually Quinsy, Rich Dad does not count houses (or condos) as assets, so by that chart, you would have a negative net worth.

E.D.
E.D.
12 years ago

I track our NW and expenses in one Excel sheet (assets/liabilities and income/expense). In terms of tangible non-cash assets, we are only counting the house (current market value) and our cars (private sale KBB value).

Right now our net worth is ~$260k, which I think is fine considering that we have only been out of graduate school for five years and have only been at our expected earning power for a few months (husband had a long postdoc).

Jenna
Jenna
12 years ago

Well to clarify, if the house or condo brought money in every month, then it would be an asset (if you owned one you were renting.) But then the rental income would be the asset, rather than the property.

If I am wrong someone correct me here – that’s just my take on the book?

Assets put money in your pocket, liabilities take it out. Thus, the homes we live in normally are liabilities, not assets.

kick_push
kick_push
12 years ago

i’ve been using networthiq since december of last year.. i was inputting month to month.. but i might just do it quarterly from now on.. no need to micromanage

i think 2008 has been a bad year for everyone =(

my net worth has gone down significantly because housing prices and stocks haven’t been doing too well

Conrad
Conrad
12 years ago

Net worth is just another way to calculate “retirement readiness” from a financial perspective. It’s not the only way, and there are dozens or better ways. I am 37 years old and my net worth is $170,000 if you include home equity, $140,000 if you exclude home equity. The $140,000 is comprised of unrealized gains from 401k, cash on hand and a 2 month emergency fund. Am I ready to retire? No, not with $140,000. I am maxing out yearly contributions to 401k at $15,500 per year and at age 55 would accumulate $1.2 million with an average 8.5% annual… Read more »

TosaJen
TosaJen
12 years ago

I have to credit Joe’s & Vicki’s Your Money or Your Life as the source of my interest in our net worth. We don’t look at it very often (the retirement funds have been on a scary roller-coaster ride), but in general, we make a point of keeping the number going up (or, at least, from going down).

We include our 529s, 401ks, houses, etc. in the number, and estimate the lowest likely value of the real estate and cars. Anything we could cash out on early retirement, we count.

We never want to be in the negative numbers again.

Canadian Dream
Canadian Dream
12 years ago

Net worth can be misleading to compare to others because people define assets and liabilities differently (eg: car, art, etc). As far as I’m concerned there isn’t a right or wrong way. I like to think of net worth as a compass. It should tell you if you are heading in the right direction if you keep the method on how you calculate it the same. If you keep changing your mind on what is or isn’t included, you end up changing your markings on your compass and can lead yourself off track. Is it the most important number? No,… Read more »

joejoeice
joejoeice
12 years ago

Comment #38 makes a great point about how changes in net worth can be largely out of our control. If a large percentage of a person’s net worth is in stocks (which is where it should be if they are far from retirement) then their net worth has almost certainly gone down over the last year even if they have been saving diligently. This is why people shouldn’t look at the ups and downs of net worth as verdicts on their own personal finance successes and failures. In the short term, net worth can go up even with horrific personal… Read more »

Mike
Mike
12 years ago

For those of you who do your banking and bill-paying online (paperless bookkeeping), yodlee.com will let you enter your bank and investments accounts (assets) and debts (liabilities) and will chart not only your net worth but cash flows, spending, and many other things. You can also track credit card rewards and offline assets. It will download transactions from your online accounts automatically, and best of all, its free!

Emma Anne
Emma Anne
12 years ago

I also started calculating net worth after reading Your Money or Your Life. I enjoy doing it because while our debt (which I track monthly) bounces around way more than I would like, our net worth is steadily going up. It reminds me that we are accomplishing things even though this month’s numbers may be frustrating.

K
K
12 years ago

Pretax money does have a different value than after tax money, but I don’t account for that in my calculations. Nobody’s net worth should be going down over periods longer than 3 months. Even if the market goes down, you should be saving at last as much to balance it out. Mine has continued to rise even through the downturn, although not as much as before. I use the Blue Book private party value for our cars, and I used our purchase price for our house last year (when we bought it) and subtracted $5k this year. I think the… Read more »

joejoeice
joejoeice
12 years ago

K @40,
I disagree that “nobody’s net worth should be going down over periods longer than three months”. The greater your net worth becomes, the more even a small percentage drop means. For someone with five hundred thousand in the market, if the market goes down 2% over half a year, they would have to put in 10,000 just to break even. Of course, this works for an investor when the market is up. For high net worth investors, in the good years, the increase in net worth comes much more from the investments themselves than the money put in.

Paul
Paul
12 years ago

@ Jenna – Rich Dad’s definitions of ‘asset’ and ‘liability’ are incorrect, and lead to some pretty bad advice. Income generation is not a requirement for something to be an asset. He jumbles assets, income, expense, and liability all up into a(IMO) giant stinking mess. He should have stuck with Amway. Anyway, I highly suggest people stop using that book (or any by that author) as reference material. They contain some nice stories, but are pretty much entirely fictious and contain incorrect (and some illegal) advice. Stick with getting advice from people who became wealthy before they wrote the book… Read more »

Jim
Jim
12 years ago

I have been using NetworthIQ to track my net worth. I think net worth is a useful metric to track your own progress. If its going up then that’s good. Comparing to other people or using it as a benchmark isn’t too helpful since everyone’s situation is different. The Millionaire Next Door formula for expected net worth has a big flaw for people in their early 20’s.

Jim

Liam R
Liam R
12 years ago

I use the “My Portfolio” feature provided by Bank of America. It’s pretty nice, tracks all of your accounts automatically as well.

Mike
Mike
12 years ago

I use Bank of America too. It uses Yodlee’s service but doesn’t offer all the features Yodlee does, such as creating custom categories. You also need to have a BoA account to use their version.

Matt
Matt
12 years ago

I like to know what my net worth is and I treat it as a snapshot of me financial health but with that said I think its a number that only paints part of the picture. If you happen to have a net worth of lets say $500K a lot of people would say you’re doing well. But that doesn’t take into account your spending habits and what your cash flow is really like. You might have the $500K but are spending $100K per year more than you make. I like using net worth as a snapshot of where you’re… Read more »

Michael
Michael
12 years ago

Net income is a better number than net worth. Mr. Darcy, for example, was worth 5,000 pounds a year.

Nicole
Nicole
12 years ago

Actually Michael, Mr. Darcy was worth 10,000 pounds per year. His good friend Mr. Bingley was worth 5,000 pounds per year. That’s why, in spite of Jane’s superior looks, Elizabeth made a more advantageous marriage. And don’t forget, Mr. Darcy and Mr. Bingley’s income was based at least in part on the value of their holdings (since they didn’t actually work for a living). So, at least here, NW is directly related to income. Not to mention, a large income is not really that helpful if one is always exceeding it (as Mr. Bennet predicts the Bingley’s are likely to… Read more »

Alex R.
Alex R.
12 years ago

I look at monthly cashflow as the most important financial consideration. You can have substantial net worth, but a negative cashflow and in my opinion you are much more financially unhealthy than someone with low net worth but awesome positive cashflow…

I think a truer sense of financial position is whether or not your passive income is exceeding your fixed expenses. Add compound interest and you’ll catch up to most people in due time…no matter their net worth.

Matias
Matias
12 years ago

I personally prefer cash flow over the net worth. How is that? Even If I am a huge believer of long-term investing and planning, I like to live now. I don’t want to save it all to the end. I really do love traveling and my plan is to finance my traveling using the cash flow from my investments. For example I like to spend 3 months in Thailand. That requires around $6000 including flights and dining out 7 days a week. Living like a millionaire without being one. What we need is an asset that generates us $500 a… Read more »

shares