Quick Question: What’s your net worth?
If you’re like most people, you don’t know. And you may not even know how to calculate it.
You may think that net worth is something only wealthy people need to worry about, but in fact, it’s a very useful figure and no matter who you are, you should know yours. Luckily, it’s not hard to figure out. In this publication, we’re going to tell you what net worth is, what it means and, most importantly, how to increase yours.
What is Net Worth?
Net worth is simply what you own minus what you owe. (What you own is usually called “assets” and what you owe is called “liabilities.”) In other words, if you had to sell everything you owned and pay off all your bills today, your net worth would be what you have left over (positive net worth), or what you still owe (negative net worth).
It’s easy to calculate your net worth. Just use the sheet at the end of this publication. In fact, you may want to do that now and then return to the rest of this publication after you’ve figured it out.
What Does It Mean?
Most of us base our idea of how well we’re doing financially on our income. When we’re making “good money,” we feel like we’re doing well. When we’re not … well, you know how that feels. We also tend to base our assessment on whether or not we’re keeping up with the bills and whether it “feels” like our standard of living is increasing.
The problem with this approach is that nothing, certainly financially, is ever guaranteed. You could lose your job suddenly, a family member could become ill or pass away, your house could burn down or be flooded. Any of these events could throw your financial life into a tailspin, if you’re not prepared. The greater your net worth, the more resources you have to help you weather financial storms.
Benefits of Calculating Your Net Worth
- It can be a helpful figure if you are applying for some loans, including business or real estate loans. You’ll also know whether you can really afford to take on more debt.
- You’ll learn how much liquid net worth you have — that is, money you could get your hands on quickly in an emergency.
- You can more accurately evaluate your insurance needs, because you’ll know what kinds of assets you already own — and what kinds of debts you have to pay should something happen.
- You will get a clear picture of your debts, as well as your assets.
- It gives you a concrete figure that you can use to track your wealth and, hopefully, make it grow each year.
Something to Strive For
Want to be wealthy? Striving to be a millionaire?
Here’s how to tell if you are on track:
In their best-selling book, The Millionaire Next Door, researchers Thomas Stanley and William Danko offer a rule of thumb for calculating net worth, no matter how much your current income or your age:
Multiply your age by your household’s annual, pre-tax income from all sources except any inheritances. Divide by 10. This is what your net worth should be.
For example, if you earn $30,000 a year before taxes, and you are 40 years old, this is how you would calculate your net worth:
30,000 x 40 = 1,200,000
1,200,000 ÷ 10 = $120,000
In their book, Stanley and Danko also explain that most millionaires are very frugal. So, if your net worth isn’t anywhere near that point, you may want to take a careful look at where your cash is going and change your approach to handling money!
Your best bet for future success is to keep your net worth headed up. Use the chart at the end of this publication to calculate your net worth each and every year.
Strategies for Increasing Your Net Worth
If you find that your net worth is negative, you need to work immediately at increasing it. If you find that it’s not as high as the “millionaire’s formula” above, you may still want to tackle it head on. Either way, here are some strategies to try:
Paying down credit cards, student loans, even a car loan or mortgage, will increase your net worth, provided you do it out of income, not savings or other assets. (If you use a consolidation loan without paying down your debt, for example, you’re just trading one kind of liability for another.)
Increase Savings and Investments
Increasing your savings and investments will have a positive and immediate effect on your net worth. Can’t save? Try these strategies:
- Take advantage of employer-sponsored retirement plans, like 401(k) or 403(b) plans. These allow you to put aside money and take a tax deduction this year, plus your earnings grow taxdeferred. Even better, some employers will match part, or all, of your savings in these accounts.
- Save it automatically. Some employers offer payroll deductions to savings accounts. Or many investment companies will arrange for automatic deductions from your savings or checking account every month to go directly into a mutual fund. You won’t miss it — promise!
- Pay yourself, for once. When you pay off all your debts, continue writing checks, but make them payable to yourself. Put the money in a savings or investment account each month and watch it grow!