How to calculate your net worth (and what to do with it)
In the spirit of getting back to basics this month at Get Rich Slowly, I’m planning to publish a series of articles about the most important numbers in personal finance. Let’s start by looking at how to calculate your net worth.
To measure the value of a business, companies talk about equity or “book value”. Jargon, right? In personal finance, equity is known as net worth. It’s exactly the same thing but on a personal level. Your net worth is an important number because it reveals how much the business of you is worth at the moment.
Still clear as mud? Maybe this definition of net worth from Wait But Why will make more sense:
“What would happen if you sold everything you own, liquidated any investments you have, paid off all of your debts, and withdrew whatever cash you have in bank accounts? You’d be standing on the street naked, with nowhere to go, holding a bunch of cash, and people would be looking at you. And whatever cash you were holding would be your net worth.”
At its core, your net worth represents how much wealth you’ve accumulated until this very moment. In the classic book Your Money or Your Life, Joe Dominguez and Vicki Robin write, “[Your net worth] is what you currently have to show for your lifetime income; the rest is memories and illusions.” Ouch. That’s a little harsh, but it’s true.
How to Calculate Your Net Worth
Net worth tracks your financial health in the same way that weight measures your fitness. Neither number tells the whole story, but as a measure of change over time each is a handy tool.
Calculating net worth is easy. It’s what you own minus what you owe. That’s it. Simple, right? Here are more detailed instructions:
1. List your assets
Check all of your bank accounts and note their balances. If you have investment and/or retirement accounts, write down how much you have in them. If you own your home, use Zillow to determine its current value. If you own a car, use Kelley Blue Book to figure out how much it’s worth. Add all of these together to find the total value of your assets.
2. Next, list your liabilities
Write down how much you owe on your car, the current balance of your mortgage, how much you have left on your student loans. Record the balance of each credit card and personal loan. The sum of everything you owe represents your total liabilities.
3. Subtract what you owe from what you own
Your net worth is your assets minus your liabilities. To make things even easier for you, I’ve created this net worth spreadsheet in Google Docs for you to copy.
Once you’ve calculated your net worth, write this number down. Burn it onto your brain. I want you to remember how much you’re worth today so that we can see the progress you’ve made in six months. And a year. And ten years. As you get better with money, your net worth will grow.
Some folks argue that you should not include the value of your home when calculating your net worth. I disagree. Net worth is a thing with a precise definition. I think it’s great to run another number that leaves out your home, if you want, but that number is not your net worth.
What Should Your Net Worth be?
People often wonder what their net worth should be. There’s no right answer. It depends on where you live, what you spend, and how much you earn. If you’re a computer programmer in Toronto, your net worth will probably be greater than if you’re a schoolteacher in Mississippi.
Some folks have created benchmarks for comparing net worth. Perhaps the best-known example of this is found in The Millionaire Next Door by Thomas Stanley and William Danko. They argue that your “expected net worth” can be determined with a simple formula:
- Divide your age by ten.
- Multiply this result by your current annual gross (pre-tax) income.
The final number, say Stanley and Danko, reveals how much money you should have.
If your net worth (minus any inheritances) is at this level, you’re an “average accumulator of wealth”. If you have less than half the expected amount, you’re an “under-accumulator of wealth”. If you have more than twice the expected wealth for your age, you’re a “prodigious accumulator of wealth”.
Let’s say, for example, that you’re thirty years old and have a net worth of $49,872.99. Your income last year was $61,191.38. Based on these figures, the rule-of-thumb from Millionaire Next Door says your net worth should be about $183,500.
Because you have a net worth of less than $91,787, Stanley and Danko would say Landes you’re an under-accumulator of wealth. If you had more than $367,000, you’d be considered an overachiever.
More Fun with Net Worth
There are other ways to look at your net worth, of course. Here are two:
- Here’s how to calculate your lifetime wealth ratio, which is your net worth divided by every penny you’ve ever earned. (So, if you have a net worth of $100,000 on $500,000 of career earnings, your lifetime wealth ratio would be 20%.)
- If you want to compare your net worth to others, Zac at Four Pillar Freedom has created a tool that lets you visualize the net worth of Americans by age.
No matter your situation, your goal should be to increase your net worth over time. This might sound glib, but it’s true: A high net worth is always better than a low net worth. The more you have, the better your financial health.
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There are 18 comments to "How to calculate your net worth (and what to do with it)".
Thank you for breaking down Net Worth in 1 simple post. I also got a good kick out of the stick picture you shared, and it is actually a good representation of showing your Net Worth!
You also wrap it up in very simple terms with “A high net worth is always bettern than a low net worth.” Personal finance needs to be taught at it’s most basic principles, and you consistently do a great job at that!
Great post!
Back to basics: Something that I believe is overdue for certain people who have forgotten the lessons of the 2008 crash.
If they ever learned them, that is.
Good to see you here again.
Thanks – nice post! I appreciate the “expected net worth” formula – hadn’t seen that before.
Expected Networth: (67/10)*$136,000=$911,200.
Actual networth=$1,872,420. Looks like I’m a prodigious accumulator of wealth.
My lifetime wealth ratio=$1,872,420/$3,317,221=55.54%. Is that good? 8^)
I have issues with the calculation from Millionaire Next Door – What about people who started saving late? How do you modify that for them? Subtract the number of years that they weren’t saving?
For us, we moved to the US from India. We did save even then, but due to the conversion rate, that would get us nothing here.
We are on our way to early retirement – We will be there in less than 10 years after we first set foot on this continent. And the only time we would have saved enough would be after retirement, and that too just because our income would go down to 0. No fair!
Yeah, I think the MND calculation is imperfect also. I always have. There’s so much it doesn’t capture. That said, if you just consider it a sort of guide, it has some value.
Yeah, I agree that is has some problems like it doesn’t account for how long you have worked at that income range. Thats one reason I like the lifetime worth calculator.
I think the book says the formula works best for people in their fifties, and doesn’t work quite well for people just starting their careers.
Which makes sense – if it’s your first year with an income, say you’re 20 years old making $30k, there’s no way you’d have $60k saves already ($30,000 * 20 / 10).
I have asked this question many times on these “Net Worth” type questions, and looking for your opinion. Do you count life insurance in net worth calculations? Personal life insurance (what do my heirs get when I croak) or other life insurance (what do I get when my parents die)? I generally count as it shows the net worth would be to my heirs, however I don’t use it for calculations for retirement (i.e. how much do I have if I want to life FIRE).
Term life insurance – I’d argue no.
Whole life insurance (or whatever the name is for the policy with some part has cash value used to pay the premium) – yes, the cash value part only.
Yes both are whole life insurance. Parents policy goes to the kids. My policy goes to my son if/when I kick it. I only count the “cash in” value of the policy, as that is what I could get today if I sold it.
I mainly dislike this formula because it doesn’t take big pay fluctuations into account very well.
Take this example from a friend of mine. Most of his adult working life, he made 50-60k. In 2017 he brought home ~110k due to a new job. Suddenly your ‘average accumulator of wealth’ number goes from a manageable ~174k for a 29 year old, to $330k now that he’s 30. Overnight just magically gain +142% of your brand new salary or you’re considered an under accumulator!
In another extreme let’s suppose someone made ~250k/year straight out of school for 10-15 years. Then they decided they hated their job at age 35, so they took a huge pay cut to do something they really liked which pays $40k. They hadn’t been diligent on saving, but if they have even $140k saved they’re considered an average accumulator of wealth? After 10-15 years of earning a quarter million dollars?
Nah.
This formula works if you don’t have big jumps in pay, but if you’re job hopping like my friend or make other drastic changes, this formula kind of breaks down. It’s too reliant on non-changing circumstances to be useful.
Lifetime Wealth Ratio does a better job at managing these fluctuations, IMO.
However the later is much more difficult to calculate. I haven’t got a SSN statement in a decade because they send me an email which tells me to login to their system to get my statement. I don’t remember my login so I am in a never ending nightmare of trying to get my account unlocked.
As with any “rules of thumb”, they work for a majority of the situations but not all. That is why they are called rules of thumb.
Great article! The illustration really brought it home ?!
The Millionaire Next Door’s net worth calculator is quite aggressive! Of course once you start saving your investments make money for you. Looking forward to more in the back to basics series.
I just wanted to add that I’ve been using the site NetworthIQ to track mine. I make a monthly entry and they have a journal feature, it’s easy to compare over time. I’m not sure if it’s currently maintained since I can’t update my account info, but I still find it a great tool for tracking.
Thanks for making this so simple! I’m hoping someone in your audience will either have a similar experience or be a spreadsheet whiz (I can use them but they always look kind of ugly).
I’m a dual citizen with assets in dollars and British pounds. Obviously, raw numbers on a spreadsheet don’t really reflect the state of our net worth. Does anyone have an elegant solution to this? I’ve searched all over and haven’t seen anything.
Ideally, it would be an extremely simple sheet with assets that, ideally, could be translated to a base currency to get the effect of “at a glance, this is going up.” But I haven’t figured out a way to do it that isn’t just 3 columns (one GPB assets, one USD asset, one conversion rate between them)
Any ideas?
Calculate my net worth with an excel spreadsheet for the first time yesterday… After 8+ years of education to become a doc I have a lot of work to do to get out of the red… But I am starting!
Very handy, thanks for the post!
The family has about a net worth of -$150,000. And to think we’ve paid off about 30k in debt. Long ways to go…