What Does Net Worth Mean?
One of the jargon phrases that often gets thrown around in the personal finance world is net worth. Sometimes it’s not mentioned explicitly but when someone says the word “millionaire” or “billionaire,” they are referring to someone’s net worth.
First and foremost - a friendly reminder - our net worth has absolutely nothing to do with our self-worth. It might sound silly to even mention this but money and our self-worth are something we often collapse into one. This is one of the reasons it’s difficult to talk about money.
When we share how much we earn or how much we have, we may consciously or subconsciously believe that defines how valuable we are as people. As long as we acknowledge that it’s completely separate, it takes a lot of power away from the number.
If the term net worth carries too much weight for you, feel free to rename it. You can call it my “numbers,” “totals,” or even something more fun like my “treasure count.”
So what does net worth mean and how do you calculate it?
SO HOW DO I CALCULATE NET WORTH? WHAT DOES NET WORTH MEAN?
Calculating your net worth is actually a very simple equation. It’s the total of what we own minus the total of what we owe. I’ve put together a Net Worth Tracker to make it as easy as possible for you to calculate your net worth and keep track of it going forward. You can also create your own spreadsheet or just write it down - whatever is easiest for you.
ADD UP WHAT YOU OWN.
First, we list out all the things we own (also called our assets). This can include various bank accounts, investment accounts, real estate, and even personal valuables. Here are some examples of the things you may own:
Bank account balances
The value of your investments accounts
The market value of your home
Your car
Personal property like jewelry, art, wine and furniture
Anything else you could sell that has value
Then add them all up. This is your total assets.
ADD UP WHAT YOU OWE.
Then we list out all the things we owe (also called liabilities). This can include credit card balances, student loans, our mortgage, or even a loan to a family member. Here are some examples of things you may owe:
Credit card balances
Mortgage
Car loan
Student loans
Personal loans
Money you owe to a family member
Then add them all up. This is your total liabilities.
SUBTRACT WHAT WE OWE FROM WHAT WE OWN.
We can then subtract the total we own minus the total we owe and that gives us our current net worth.
WHAT DOES NET WORTH MEAN?
What’s the point of calculating your net worth? What does net worth mean? One of the reasons tracking our net worth is helpful is because it’s motivating to see our progress. It also keeps us honest about our progress because it gives us the full picture.
As our financial lives get more and more complicated, it’s easier and easier to lose sight of our broader financial picture. I might see my bank balances increasing and think that I’m making headway towards my goals, only to find that my credit card balances are also increasing. If I track my net worth, I’ll see that the total isn’t actually increasing even though individual account balances are.
Keeping track of our net worth also gives you a comprehensive list of what you have and where. It’s a great financial snapshot and helps you see past ebbs and flows in the different parts.
TRACK YOUR PROGRESS.
In the Net Worth Tracker spreadsheet you start by calculating your current net worth, but there’s space to update the numbers and track your progress over time. I like to update mine every three months (once per quarter) and see what the trend looks like.
WATCH OUT FOR INVESTMENTS.
When we’re tracking our net worth each quarter (or however often you want to do it), it’s important to remember that the values of your investments will go up and down. You may have saved a lot of money over the last few months but if your investments are down, your total may not increase.
I like to do a separate tally that just tracks how much I added or subtracted from my savings and investments, without accounting for movements in investments. This way I can see the total dollar amount I’ve contributed towards my goals. Both numbers are helpful.
Calculating your net worth (or whatever you prefer to call it) is a great way to check in and track your progress each quarter. It’s also a great way to get a snapshot of what you have and where. It’s not only motivating, it keeps us honest about our progress and might even give you some ideas for how to simplify and improve your financial well-being.