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WHAT’S MY NET WORTH? Do I know? Should I know?
These are questions I’ve thought about long and hard. After tracking the combined net worth of my wife and me for the past five years, I’ve concluded that the answer to that third question—should I know?—is a resounding yes. Before we get to the reasons, let’s start with a few basics.
What is net worth? According to Wikipedia, net worth is “the value of all the nonfinancial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities.” Put another way, your net worth is how much money you would have left if everything you own, financial and physical, was sold and used to pay off all the debts you owe.
Net worth might sound a bit contrived. After all, it doesn’t tell you if you have enough money in your checking account to pay this month’s rent or credit card bill. Its real value is to provide a single, clear measure of your financial health at any moment, as well as over time.
Why track net worth? First, it provides a simple, summarized view of our entire financial situation. My wife and I have four bank accounts, two vehicles, five retirement accounts, a primary home with a mortgage, and two rental properties with mortgages. If I look at each of those categories individually, it doesn’t provide me with a sense of how we’re doing overall.
Second, if one of those areas is doing particularly well or poorly, I can easily get a distorted feeling about our financial condition. If I look at our net worth, I get an accurate, if simplified, snapshot of our standing.
Third, it helps me better understand the effect of our financial choices. For me, this was especially important when it came to paying off debt.
In the past, paying down car loans, credit cards or our mortgage didn’t excite me as much as saving money in a retirement account. Perhaps it was because debt payments made the subtracting number smaller, but saving made our account values larger—and that’s the number I tend to focus on. Viewed in terms of net worth, however, paying down debt increased our total value just as effectively as savings could.
How do I calculate net worth? First, identify the broad categories that comprise your financial and physical assets. I use five main categories: bank accounts, retirement accounts, vehicles, real estate and miscellaneous.
Second, list all assets and debts for each category. For example, under retirement accounts, I list out our 401(k)s, Roth IRAs and health savings accounts. Under vehicles, I list each vehicle we own and any outstanding loans on them. Under real estate, I list each property we own, along with each mortgage we have. Finally, under miscellaneous, I list things like student loans and vested stock units from my employer.
Third, record the value of each item listed. For bank accounts, retirement accounts and debts, just look up your balance or amount outstanding. For nonfinancial assets, you can get free estimates from websites like Kelley Blue Book for vehicles and Zillow for real estate.
Fourth, add up the value of all the assets and subtract the debts and—bingo—you’ve calculated your net worth.
A few additional tips. You might be tempted to include personal household possessions like jewelry, furniture and appliances. Unless your grandma left you a particularly valuable piece of jewelry that you’d consider selling, I’d leave personal household possessions out. They’re hard to sell and might not fetch much anyway.
Some experts take this even further, advising that you exclude your primary residence and your car, while still figuring in the debts associated with these assets. The rationale: It would be tough to live without a home and a car, so they aren’t readily sellable, but you’re still on the hook for the associated debt.
I recommend calculating your net worth once a year. It doesn’t matter when as long as you’re consistent. I look forward to the tradition of calculating our net worth every Jan. 1.
Once you have a few years’ worth of data, you can easily plot a chart showing your change in net worth over time. You’ll immediately see what sort of financial trajectory you’re on.
My advice: Use your net worth to bolster your spirits during tough times. It’s been painful to watch our retirement accounts fall this year. I take solace in knowing that our higher property values, steady mortgage payments and aggressive saving have helped counteract those losses.
Our net worth has increased year over year, although by a much smaller amount than before. It’s little wins like this that can help you stay the course during life’s financial storms.
Austin Dorenkamp wears many hats including software engineer, program manager, landlord, husband and therapy dog handler. He’s even been called an ice cream sommelier. If he’s not giving those around him unsolicited financial advice, Austin’s likely cracking a joke or driving in a time-efficient manner. His previous article was Just Another Car.
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Excellent article Austin. Thanks for taking the time to write it.
Knowing our net worth is helpful for all ages, particularly as a savings motivator when we’re younger, and a guide for how much we can give away to others when older and retired. Seeing our net worth decline each year as more goes to charity and family (and less to future inheritance/estate taxes) is even more satisfying than saving and watching it grow during our working years.
What a blessing to follow the Humble Dollar theme of “living within your means and investing wisely over many years” because now we enjoy sharing our excess with others.
I do a net worth statement every year. It is especially helpful in retirement to see our net worth. I have been retired 12 years and our net worth has steadily grown during that period because we live off of pensions and SS. This year may be different but it is important to keep tracking it.
Austin, I’m in the camp with those that believe NW is a useful tool. It may not tell exactly how retirement ready I am, but like Larry, I think watching the milestones pass makes the trip more fun.
I use Personal Capital linked to all my assets and accounts. It gives me an instant view of my net worth in seconds. It also breaks it down by account and even let’s you track each transaction done with credit cards, debit cards and checks. The biggest short coming of net worth as a financial metric is its only a fraction of your true financial picture. It leaves out pensions and Social Security. I’ll be receiving over $70,000 a year in inflation adjusted Social Security payments starting in four years. That’s equivalent to almost two million dollars of investments yet it isn’t included in net worth making my net worth pretty distorted in terms of defining my true wealth. You might argue that Social Security could be changed or even eliminated at some point in the future, but that’s true of all my investments as well.
Question/s…when calculating net worth should the federal and state taxes owed on investments be subtracted…also, we all have to live somewhere (maintenance & taxes) and drive a depreciating asset so neither will probably be sold at a profit…good luck with downsizing.
Austin, you’re young. You have been doing this five years. Great. I am old. I have been doing this for forty years. I have our one page net worth on a simple Excel sheet. It does not take long to update each year. I print it out and stick it in a (now thick) folder. Of course, our early ones were pre-computers and are hand written.
This exercise encourages us, once a year, to systematically think long term. Is our net worth increasing? Is our debt decreasing and what is our plan to reduce debt? Of course, it is always nice when you hit a major milestone – the first time net worth exceeds $100,000 or reaches seven figures.
Or, you could link all your accounts, assets, debt in a tool such as Fidelity net worth calculator and everything except major changes such as selling a property is auto updated daily for you. All you have to do is lower debt balances.
I agree it’s an interesting number to know, but how necessary I’m not sure unless one is concerned about state and federal estate or inheritance taxes. Having it updated could be a big help for anyone settling an estate.
Using net worth as a guide to how well one is doing toward retirement may provide a false sense of security unless selling some major assets is part of the retirement plan. A third of my net worth is in two homes neither of which I view as a usable investment.