Many people think they’re wealthy by the amount of money they make per year. They believe that a successful career or having lots of expensive vehicles next to a fancy house makes them rich. But if you want to figure out how wealthy you really are, you have to calculate something else. The measure of your wealth is your net worth. This is the true measure of your financial success.
When I first started out on my financial journey, it was easy to get confused about what true wealth really was. We are surrounded by television ads and social media that often gives us a false impression of what true wealth really is. And this is a deep rabbit hole you can fall into if you’re not careful! We get inundated with varying ideas on how to make and grow our money. It can get murky quick. These conflicting opinions can damage our own success unless we’re careful.
There is this prevailing thought that the more money you make, the wealthier you are. It’s easy to assume since we see high-income individuals living a rich lifestyle. We see movie stars flaunting their wealth. On social media, we are flooded with what seems like highly successful people flinging handfuls of cash at you trying to get you to purchase what they have to offer so you can be rich just like them. It seems like it’s a goal many people desire. We, as a nation, are hooked on the allure. However, this narrative is not always the truth. Making more money doesn’t guarantee wealth.
But let’s back up a minute. Let’s get back to the basics.
Let’s talk about what makes a real difference in our lives. And it doesn’t matter if your annual income is high or low. Because you can become wealthy even from a normal job. But what should be our financial goal if it’s not to just make more money? And to answer that let’s keep it really simple by answering a question: what is a basic measuring stick to identify your true wealth?
Your net worth.
And your purpose should be to enable its growth. The good news is you can start today no matter how much your paycheck brings in.
Often you don’t really hear about the word “net worth” unless you’re watching some television show involving the ultra-wealthy. Then that’s all their talking about, their net worth. But for the rest of us, it’s often overlooked and not emphasized enough. How many times have you wondered what your neighbor’s net worth is? Now let’s get personal. What is your net worth? Do you know what it is? And why is it important to figure out?
Well, let’s take a look.
What Exactly Is Net Worth?
Fortunately, there is a simple answer to this. It’s your total assets minus your liabilities. An asset is something that has a money value (or puts money into your bank account like a business). Liabilities are things that take money from your account (like a car payment).
And, yep, it’s just basic math here. But I bet you can’t name your number, can you? Sure, you may have an “idea” of where you stand, but that actual number compared to last year’s number is probably an unknown figure, correct? Did it go up this year or perhaps down instead? (We’ll go into why it’s important in a minute).
Calculating this number is fairly simple. The hardest part actually is gathering all the information to come up with this number. But this process can be enlightening. You need a calculator or you can use a free app like Personal Capital to help calculate it for you.
I like to go old-school and get out the pencil and paper to start. You can elaborate more and keep more permanent records with a spreadsheet. There are countless apps out there to assist you as well.
Step 1: List all of the assets (things that have monetary value) that you own
- The amount of your checking and savings accounts
- The worth of your home
- The value of all your automobiles
- Any 401k/403b accounts
- Don’t forget about any IRAs or other monetary accounts you have lingering about
- The cash you’ve got stored in the sock drawer
Some of these things can be a bit tricky such as the value of our cars and homes. Some would argue to not even include them in our calculation, but let’s keep them here for now since they do hold value. You can find a good estimate of your vehicles by going to Kelly Blue Book.
With your home, you could visit a realty site online, which will give you a rough estimate. You can certainly guess but that’s inaccurate as well (my last house ended up being $30,000 less than I “thought” it was worth) because the value is tied to what’s recently sold with comparable features. A real estate agent might also be helpful. A home appraisal is much more accurate but they are expensive and not needed for our calculation here. A good estimate will work just fine.
Step 2: List all of your (liabilities) debts
- The mortgage on your home (what you owe)
- Automobile loans
- Student loans
- Credit cards
- That $300 bucks you owe Uncle John
Step 3: Subtract step 2 (your debts) from step 1 (your assets)
What you want here is a positive number as should be obvious. But guess what? This number isn’t always (and frequently isn’t) positive when you’re just starting out. Yeah, painful. When you’re young, this may be the case. If you’re unwise with money this will remain the case. Hopefully the older you get the more positive the number – that’s why we’re on this journey. To improve this number.
Let’s take an example to let it sink in:
Julie is 35, single, and makes $230,000 per year
Julie’s assets:
- Home value – $250,000
- Retirement account – $75,000
- Car value- $12,000
- Checking account – $1,200
- Savings account – $2,500
- Emergency savings she’s gradually increasing (good job, Julie) – $5,700
- Total assets = $346,400
Julie’s Liabilities:
- Mortgage owing – $235,000
- Credit Cards – $10,325
- Automobile loans – $22,500
- Student loans – $18,000
- Total liabilities = $285,825
Julie’s net worth: $60,575 ($346,400 – $285,825)
Ok, let’s stop here for a minute. Let’s note that her net worth is positive. Good. But did you see how much Julie makes per year?
$230,000? Seriously?
Who makes that kind of money and why would I include it here? But let’s answer a simple question first. Wouldn’t you think her net worth should be more seeing that she made so much?
Let’s now change her income to $90,000. If her assets and liability numbers don’t change, her net worth is still $60,575.
Your income doesn’t figure into this number! Julie could be a horrible spender for all we know. Maybe she blows through most of that 230k. The bottom line is that her “assets” only add up to a certain amount. What matters overall is her net worth. It shows her true financial situation.
A Side Note:
An even more accurate measure of Julie’s wealth is what’s called “liquid net worth“. This is your net worth from your assets that can be liquidated quickly. Meaning, your home and autos are generally not part of the equation here. 401(k) and 403(b) are sometimes considered liquid because you can access quickly but there are steep penalties for doing so. Your liquid net worth will be much lower than your total net worth.
In Julie’s case, her liquid net worth would be a NEGATIVE $201,425! Yep, she still has to pay on the home, but it’s not counted in her liquid assets because it takes so long to convert to cash.
Figuring this number is a great motivator for Julie to increase her savings accounts, her emergency savings, and her investment accounts.
Step4: Create a goal of $100,000 net worth. Then $500,000. Then One Million
Ok, so this is a “bonus step” since the actual math stops at steps 1 – 3! This extra step emphasizes the benefits of doing the earlier steps. It enlightens your own personal situation financially.
Ultimately, your goal should be to get this number to grow. It will give you more freedom and security later on. You may start out negative now, but eventually, by being smart about your finances you will have a growing net worth. That is the true measure of wealth.
(The extra benefit of step 4 is that it pushes us to the next reason for tracking your net worth below)
Why You Should Track Your Net Worth
Let’s recap: your financial worth does not equal your income. Let that sink in for a minute. Ok, you probably need two minutes! As the old saying goes, “it’s not about how much you make, it’s about how much you keep that matters.”
It’s your financial measuring stick
As with anything worthwhile, you have to usually strive to get it. Nothing seems to come free (or if it does it you better examine it more closely!). It’s the same financially.
Unless you’re tracking your net worth, you don’t really know where you stand. Have you ever heard about the story of someone who makes $70,000 per year but saves and invests 30% of it ending up wealthier than someone who makes $300,000 a year but spends 95% of it? It’s basic math.
My recommendation is to graph this wealth. There is nothing more enlightening than seeing your numbers trending up on a graph. Go old-fashioned if you need to. Today, there is more tech out there that can produce colorful trending charts for you to examine. Use whatever motivates you.
And don’t be depressed about how you measure up today. It’s easy to look down on yourself just starting with this process. I know, I’ve had numbers that have been in the negative net worth. It’s good to know where you stand. And make today the day you begin to improve upon it. And with an annual check (or semi-annual) you can track this progress and do things to make it grow.
It tells you if your finances are healthy or sick
Your net worth tells of your overall health financially. This is similar to the previous reason, but here it quickly identifies areas where this number is suffering from. As we pay off our old debt, you may think that you’re in a good place. But as you track it against all the other liabilities you may have it will tell you what kind of health you’re actually in.
Because believe it or not, it’s easy to acquire “new debt” without realizing it. For instance, what about that new sofa you recently put on monthly payments? What about the car payments you’re considering because your car is so old? See what I mean? Tracking this will help keep these liabilities in check.
It’s easy to want to hide our debts, the things that rob us of our wealth. We tend to do a really good job of hiding this from ourselves. I know I do. This will set us straight. Because overall it’s just numbers. Math doesn’t lie. So tracking your wealth will ultimately result in you making better decisions with your money. By tracking it, you will be more concerned with it. You’ll want it to grow.
Remember, the amount of your paycheck doesn’t deserve the biggest attention. That $70k per year individual could have a higher net worth than the $300k per year person. The amount you bring in isn’t the biggest factor. How you manage it is. Financial freedom is about how much you keep and how you put it to use for your (vs against you).
It’s your motivation
We all need it. We need a bit of cheerleading in our corner from time to time. It’s one of the things that made a difference in my life. As I tackled my short-term debt, my net worth number began to rise. While I’m paying for my home, this number continues to rise. Just remember, this net worth number can go down as well if you get yourself into more debt or use those credit cards for frivolous things.
This number is fluid. It moves back and forth. However, the goal is for that line to make a steady climb from the left lower corner of your screen to the upper right when you’re graphing it. It shows you’re growing your wealth, your growing your net worth.
I know that for myself, it helped me get more proactive towards influencing this number. It made me want to dig myself out of debt. And it provided motivation to keep me going.
It’s hard to sacrifice for your future. Eating in vs going out all the time can be rough. Skipping some luxuries in life can be hard. By tracking your net worth, you can easily validate your efforts. You can visually see your sacrifices paying off.
It tells you how stupid you’ve been
Yep, been there myself, so I’m not picking on just you. I think we’ve all been in the same boat here. How many times have you bought something only to realize a year later that you rarely used it and it was overall a complete waste of money?
I’ve done this so many times it frustrates me when I think about all the opportunities I’ve lost over the years. This has impacted my current net worth. It impacts my future net worth and how I might live later in retirement. So by tracking this, you will pay more attention. Sure, we’re not able to spend every dollar to increase our net worth. We still have to live and enjoy life too. But it will force you to be more conscious of it which will (hopefully) cause you to make better choices.
It highlights the importance of your investments
It’s always good to check in on your investments from time to time. If you’re investing in real estate, you want to see your home (and other properties) go up in value. It shows your net worth growing. If you’re investing in the stock market, you want to see those dollars increase.
If these numbers go down in your investments, it will encourage you to look at those investments to see if they are still viable, good investments. It will help you examine if you’re playing things too risky or maybe too conservative. I know I’ve been in both situations. I’ve had investments that were too risky and I lost a lot. Then I’ve had too many conservative investments where everyone else seemed to be making more than I was.
This forced me to increase my education. The smarter you are, the better you usually do. By tracking my net worth, it encouraged me to get more serious about not only increasing my savings and investing amounts but what I was actually doing with those investments as well.
It also helps me want to have income-producing assets. Whether that’s from rental income, owning a business, or having dividend-paying stocks, these regular producing income streams will gradually increase our net worth automatically. This helps to create a stronger financial position to stand on.
Summary: Your Net Worth Can Tell You When You’ve Achieved Financial Freedom
Like I said, your net worth is simply a big measuring stick. It’s where you stand financially. We’re all in this game to succeed, correct? To try to make our lives (and retirement) a bit more pleasurable without having to work until we’re 85, right? Well, this is how we measure our success. And by proper measurements, we’re able to set goals that hopefully will enable us to retire at an age you hope for.
This number can tell you when your income from your investments is greater than your expenses. Remember, the measure of your wealth is your net worth. It’s a great guide to tell you when you’ve passed this mark.
Although nothing is guaranteed in life, by calculating and tracking this number I believe you will have a greater chance of meeting your goals. It will show you where you’re short. Or where you’re doing great. It will give you a picture over time of your progress. Are you on the projection you planned yourself to be on? What can you do to make a difference in your progress?
So, go live your life and enjoy the progress you make each and every year. Now you have a great tool to truly see where you’re at and where you’re going.
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