Why Knowing Your Net Worth Is Important

Your net worth is the amount by which your assets exceed your liabilities. In simple terms, net worth is the difference between what you own and what you owe. If your assets exceed your liabilities, you have a positive net worth. Conversely, if your liabilities are greater than your assets, you have a negative net worth.1

Your net worth provides a snapshot of your financial situation at this point in time. If you calculate your net worth today, you will see the end result of everything you’ve earned and everything you’ve spent up until right now. While this figure is helpful—for example, it can provide a wake-up call if you are completely off track, or a “job-well-done” confirmation, if you are doing well—tracking your net worth over time, offers a more meaningful view of your finances.

When calculated periodically, your net worth can be viewed as a financial report card that allows you to evaluate your current financial status and can help you figure out what you need to do in order to reach your financial goals.

Net Worth

Your assets are anything of value that you own that can be converted into cash. Examples include investments, bank and brokerage accounts, retirement funds, real estate and personal property (vehicles, jewelry, and collectibles)—and, of course, cash itself. Intangibles such as your personal network are sometimes considered assets as well. Your liabilities, on the other hand, represent your debts, such as loans, mortgages, credit card debt, medical bills, and student loans. The difference between the total value of your assets and liabilities is your net worth.

One of the challenges in calculating your net worth is assigning accurate values to all of your assets. It’s important to make conservative estimates when placing value on certain assets in order to avoid inflating your net worth (i.e., having an unrealistic view of your wealth). Your home, for example, is probably your most valuable asset and can have a significant impact on your financial situation. Determining an accurate value of your home—by comparing it to similar homes in your area that have recently been sold or by consulting with a qualified real estate professional—can help you calculate realistic net worth.

Notably, however, there is some debate about whether personal residences should be considered assets for the purpose of calculating net worth. Some financial experts believe that the equity in your home and the market value of your home should be considered assets because these values can be converted to cash in the event of a sale.

That said, other experts feel that even if the homeowner did receive cash from the sale of the home, that cash would have to go toward the purchase or rental of another home. This essentially means that the cash received becomes a new liability—the cost of replacement housing. Of course, if the home being sold has more value than the replacement residence, part of the former home’s value can be considered an asset.

Because it’s easy to inflate the value of your assets, it’s better to err on the conservative side when assigning financial value.

What Does It Mean?

Your net worth can tell you many things. If the figure is negative, it means you owe more than you own. If the number is positive, you own more than you owe. For example, if your assets equal $200,000 and your liabilities are $100,000, you will have a positive net worth of $100,000 ($200,000 – $100,000 = $100,000). Conversely, if your assets equal $100,000 and your liabilities are $200,000, you will have a negative net worth of minus $100,000 ($100,000 – $200,000 = -$100,000). Negative net worth does not necessarily indicate that you are financially irresponsible; it just means that—right now—you have more liabilities than assets.

Like the stock market, your net worth will fluctuate. However, also like the stock market, it is the overall trend that is important. Ideally, your net worth continues to grow as you age—as you pay down debt, build equity in your home, acquire more assets, and so forth. At some point, it is normal for your net worth to fall, as you begin to tap into your savings and investments for retirement income.