A funny thing happened to me this week.
Let’s start from the beginning. I left my old job in August 2016 to prepare for teaching abroad. Last week, the payroll & benefits manager from my old job hit me up on LinkedIn.
Something told me on Wednesday to actually read the message.
She asked for a new address for my 401K benefits.
I’m thinking, “I don’t have any. I rolled over everything into an IRA before I left for China.”
So I rushed to Fidelity’s website, got my username, reset my PW and “SURPRISE!” $1,060 was waiting for me! WOOT WOOT!
In March 2017—a full 7 months after I left—the company put another lump sum into the accounts of employees from the previous year. I HAD NO IDEA!
After calculating my net worth in October, I knew I needed to pay off, at least, $1,713 in loans to finally break even.
With this newfound money, I recalculated. My other investments went up enough that I finally became NET WORTH-POSITIVE. Ya girl is worth $13.83, as of November 6, 2019. Got a long way to go. My 20s were a mess!
Overall, I’m pumped! I remember a day when I thought I’d never get to $0. The increase is due to shifting my mindset and habits and hard work.
Since January 2017, my net worth has turned around by almost $38,000! I can’t wait to see it climb higher.
So why am I so geeked about this number?
What is net worth?
Your net worth is a snapshot of your financial situation at the time. It is the sum of your assets (what you own) minus your liabilities (what you owe). The goal is to always have more assets than liabilities—own more than you owe—to have an increasingly positive net worth.
I personally believe your net worth is a much better indication of how well you deal with money than a credit score. That three-digit score only focuses on how you manage debt—liabilities, not assets). Your net worth gives you the entire scope of your finances and habits that created your financial status.
Do you get why I’m pumped about finally having a positive net worth now? My positive number means I’m finally getting closer to being debt-free and being able to shovel huge percentages of my income into asset-building. My positive net worth is a reflection of the good financial habits I’ve built over the years.
Let’s talk about what net worth is NOT. IT is NOT your personal value!
Your net worth—whether positive or negative—does not determine your character or the gifts and skills you offer to this world. So don’t get down on yourself if you have a negative net worth. That number could go up with planning and persistence! I’m proof!
Why is net worth important? Why should you care about IT?
- Shows where you stand financially. Again, your net worth is a snapshot of your financial life. It takes into account everything you owe and everything you own to see which column has the highest amount.
- Helps improve financial planning. If you look at your statement and say, ‘Wow. I have little to no assets and way too many debts!’ then you know you’ve got to get to work to change that. Awareness is the first step. Your net worth statement brings awareness. Kiyosaki says, “If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities.”
- Helps track your progress over time. Whatever gets measured grows. When you’re intentional about increasing your net worth, it will most likely happen. Also, you’ll start to notice trends or remember milestones when you start tracking it. Your net worth statements can become a diary. You’ll look at a spike in June 2019 and remember when you sold your car. Or you’ll see steady increases from October 2018 to April 2019, when you focused on building a Sunny Day Fund.
- Connects small habits with big picture. When you notice those trends or milestones, you’ll start connecting them to good financial habits like making extra payments on debt and investing 10% of your paycheck into retirement accounts monthly and religiously. Your habits create your life and, in this case, your net worth.
When talking about business on a podcast, Cornelia Shipley said, “Understand your numbers in a way that can drive behavior.”
That notion also applies to net worth. You wouldn’t request directions in Google Maps without stating your “Current Location”, right? It’s the same with any other goal. You must know your starting point to get clear directions to your destination.
How do you calculate net worth?
The net worth formula is simple: Net worth = assets (what you own) – liabilities (what you own).
A positive net worth means you have more money in the assets column than liabilities. A negative net worth means you have more money going toward liabilities than assets.
You could use an online calculator like this one on Bankrate or the free printable you can download right now.
What are assets and liabilities?
“If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities.” – Robert Kiyosaki
If you’ve read Rich Dad, Poor Dad, then you probably have a very clear picture of this. Robert Kiyosaki says, “An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket. This really is all you need to know.”
Assets (what you own) include cash and things you could sell for cash, for example:
- Cash/Checking/Savings (e.g. Sunny Day Fund a.k.a. emergency fund)
- Home value (By the way, Kiyosaki says your house is not an asset. Other sources disagree.)
- Other real estate property (e.g. land, second homes, rental property, commercial property)
- Car value (Check Kelley Blue Book.)
- Retirement accounts (e.g. 401(k), IRAs, etc.)
- Investments (e.g. stocks, bonds, mutual funds, etc.)
- Market value of investment-quality art, equipment, appliances and other household items
- Intellectual property
Liabilities (what you owe) include:
- Car loan
- School loans
- Personal loans
- Credit card debt
- Medical debt
- Payday loans
PLOT TWIST! I do not include cash, money in my checking account, money in sinking funds and the market value of personal property in my assets column.
Here’s why: Those numbers could give you a false read.
My everyday checking account changes from month-to-month depending on my bills, goals and activities.
Also, my sinking funds include money that’s meant to be spent. So if I have a sinking fund that I’m feeding every month for 6 months for the car insurance bill, my net worth will look like it’s going up every month. When I take out the money on the 6th month, my asset column and net worth sink, too.
As far as personal property: They may have cost a lot to buy, but may not be worth much during a resell.
I’d rather track trends of the big fish—savings and investments I don’t intend on touching in the short term and debt payments. These items greatly affect my net worth.
Choose what makes sense to you. Different strokes for different folks.
How often should you check your net worth?
Some folks track it every month. Others do it every quarter or once a year. I recommend quarterly, at least, so you can start to see trends and adjust your financial plan throughout the year.
I calculate mine every month as motivation to keep crushing debt. I’m mainly focused on the liabilities side and seeing that number go down to produce a better net worth.
How can you improve your net worth?
It’s simple. Increase your assets and decrease your liabilities. Simple ain’t always easy, right? Otherwise, all of us would be debt-free in a year.
Anyway, consider these basic steps to improve your net worth:
- Be intentional with your spending. Knowing that increasing assets and decreasing liabilities is the goal, you can strive to increase your income and give your dollars marching orders to buy more assets (e.g. property, investments) and reduce liabilities (e.g. pay off debt).
- Start saving every month. Even if you can only save $50 a month, that’s still $50 more on the positive side of the net worth formula.
- Pay off debt as quickly as possible and don’t acquire more debt. My ebook, The G.O.O.D. Life Starter Set, details 16 must-have tools to use other than a budget to crush debt. These are the same tools I’ve used to pay off $27,000 in debt and counting! If you eliminate all of your debt, then you have no liabilities. Plus, all of your freed-up income can be used to build assets. See how that works?
How much net worth should I have at my age?
I wouldn’t get hung up on the ideal net worth too much, especially if you easily get depressed about being behind. Just go for it! Start building those assets!
It’s hard to say what is the “right” number for your age, location, etc. What’s important is knowing if your heading in the right direction and figuring out a plan to reach your unique goals.
There are some people who have shot over the suggested amount and amassed $100,000 in their mid-20s. Others in their 20s are cash-strapped because of student loans and a low income. Therefore, they have a negative net worth.
Focus on doing what you can with what you have.
But for your reference, The Balance suggests the following net worth goals by age:
- By age 30, have half of your annual salary in retirement accounts.
- By age 40, have twice your annual salary.
By age 30 your goal is to have an amount equal to half your salary saved into your retirement account. So, if you’re making $60,000 in your 20s, strive for a $30,000 net worth by age 30. That milestone is possible through saving and investing. Let’s stay you start investing $3,466 each year ($288 per month) starting at age 23. If your investment account earns 7 percent annually, you’ll reach a $30,000 net worth by age 30.
If you want to see how you compare to others in the U.S., then check out this comparison table from Nerd Wallet.