Net worth is the calculation of what you own, your assets, minus what you owe, or your liabilities. Your net worth is a useful tool to track your financial progress and gauge your overall financial health.
Assets and Liabilities Defined
An asset is anything you own that has monetary value. That includes cash, checking and savings, retirement and brokerage accounts, and the cash value of life insurance policies. Physical assets such as jewelry, vehicles, and the value of your home also factor into your net worth.
Examples of assets:
- Bank accounts (checking, savings, certificates of deposit, etc.)
- Real estate
- Retirement accounts
Liabilities, on the other hand, are accounts that you owe money on. For example, the principal of your mortgage, auto loans, and other debt are considered liabilities. They detract from your net worth.
Examples of liabilities:
- Mortgage principal
- Auto loans
- Student loans
- Unpaid credit card balances
- Payday loans
- Unsecured personal loans
- Secured personal loans
- Other debts
When you add the total value of your assets and subtract the total value of your liabilities, the resulting number is your net worth.
Why Your Net Worth Matters
Your net worth is an indicator of your financial health. Relying on income alone to track your financial progress doesn’t paint an accurate picture of your wealth.
For example, if your income increases every year, it can feel like your financial health is improving. But if you’re not saving or investing, or if you take on additional debt year after year, then your net worth may actually be decreasing.
A growing net worth signifies that you’re building wealth, whereas a declining one shows that there may be areas you need to address. Tracking your net worth will help keep your savings and debt in perspective and show you where to focus your financial efforts.
What If Your Net Worth Is Negative?
A negative net worth means that the sum of your liabilities is greater than that of your assets. While this isn’t ideal, it’s common for younger people and new college graduates or those just beginning their careers.
If your net worth is low or negative, you can improve it in two ways:
- Increase your assets
- Decrease your liabilities
The simplest way to increase your assets is to save and invest more of your income. On the other side of the equation, you can also focus on decreasing your liabilities by paying down debts. Either method results in an increase to your net worth.
How to Track Your Net Worth
Your net worth is a number you should track from month to month or, at the very least, year to year. You can do so using a spreadsheet, pen and paper, or signing up for a free app such asstrong> Personal Capital
Personal Capital links to your bank, retirement, and investing accounts and tracks your net worth in real time. The app can also track your monthly cash flow, portfolio performance, and retirement savings to give you a view of your overall financial picture in one place.