How to Calculate Your Net Worth & Why It Matters!
Net worth is only one portion of a person's overall financial health. Read on to see how to calculate it, as well as how to maintain good financial health.
We hear a lot about net worth, but what exactly does net worth mean and why does it matter? Here, you'll learn more about what your net worth is, how to calculate it and the role it plays in your investment strategy and finances.
What Does “Net Worth” Mean?
Net worth refers to all of your assets minus liabilities, or what you own minus what you owe. For example, if your house is worth $1,000,000 and you have a $500,000 mortgage, you own $500,000 in equity.
How do you Calculate Net Worth?
To calculate your net worth, first, take an inventory of everything you own. Net worth generally includes cash, investments, property, vehicles and anything else you own. To get an accurate estimate for depreciating assets (such as cars), you may need to research how much they are currently worth. Remember, your net worth can include assets you are paying off (such as a home) because you will subtract what you owe.
Here are some things you should include when calculating your net worth (although this list isn’t exhaustive):
- Checking accounts
- Savings accounts
- CDs (certificates of deposit)
- Other cash
- Mutual Funds
- Treasury bills
- Bullion (silver, gold, etc.)
- Other investments
- Real estate (market value)
- Investment properties
- Jewelry, art and collectibles
- Other property
- Retirement accounts (IRA, 401(K), pension plans, etc.)
- Social security
- Other retirement assets
Once you have an inventory of everything you own, subtract what you owe. Here are some examples of liabilities:
- Auto loans
- Credit card debt
- Consumer loans
- Student loans
- Unpaid taxes
After subtracting your liabilities from your assets, you will have your net worth.
Net Worth and Your Financial Health
A lot of people talk about net worth as a part of your financial health and while it’s an important part, it’s only one part of your overall financial picture. There are many caveats and considerations with net worth.
For example, net worth doesn’t include your annual income, so someone with a high annual income but with higher expenses could have a lower net worth than someone with a lower annual income that invests in appreciating assets. Those focused on growing their net worth may consider investing in appreciating assets and lowering their debt and liabilities.
In addition, net worth may have implications on your taxes. Your tax bracket may be determined by your annual income, but those brackets don’t necessarily include net worth.1 So if you are a high-income earner, have a high debt-to-income ratio, and are in one of the highest marginal rate tax brackets, you may accumulate net worth much lower than someone who makes less money annually, but has less debt, more appreciating assets and is in a lower tax bracket.
Working with one of CRA's retirement advisors, they will take your net worth into consideration, but will mainly consider your lifestyle and what is impacting whether or not you are accumulating wealth. This is all included in our holistic approach to advisement, which encompasses much more than just net worth or the cash you have available right now, but rather all avenues of investment possibility. Rather than look at net worth alone, our advisors instead look at investable assets, which is the amount of money you have ready to invest. Net worth can be tied up in property or other investments and may not be liquid enough to invest.
This video from Prosperity Capital Advisors explains what a holistic advisor, and why this type of advising is preferred over other approaches.
Understanding your financial health is important to us and net worth is just one component. If our holistic approach to your retirement sounds right for you, please feel free to contact one of our qualified advisors today to take control of your finances and enjoy security.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.