Net Worth Meaning and How to Calculate It

Many people only think net worth applies to wealthy celebrities and high-profile CEOs. However, you can also learn to calculate your net worth and get a quick snapshot of your overall financial situation.

To define net worth means to assess what you own, what you owe, and the difference between the two. Your net worth can be positive, zero, or negative. The distinction isn’t about judgment – it’s about gaining clarity to make smart decisions about saving, spending, investing, and paying off debt.

The financial pros at Tower Loan explain how to calculate net worth and why it matters for your financial future.

What Does Net Worth Mean?

To define net worth, let’s start with the simplest explanation: the dollar value of your financial life at a certain point in time.

Net worth differs from income: two people could earn the exact same salary and have completely different net worths. Rather than focusing on income alone, net worth is the difference between your assets (what you own) and your liabilities (what you owe).

Formula to Calculate Net Worth

The formula to calculate your net worth is simple: Assets – Liabilities = Net Worth.

The date you calculate net worth provides a snapshot for that particular day. If you run the numbers again in a few months, the result could be quite different.

Step-by-Step Guide for How to Calculate Your Net Worth

1. List Your Assets

The first step of the net worth formula is to make a list of everything you own that has monetary value. Examples include:

• Cash and cash equivalents, like checking and savings accounts
• Investments like brokerage accounts, CDs, and bonds
• Retirement accounts like 401(k)s, traditional and Roth IRAs, and pension balances
• Real estate, including the estimated value of your home and any rental property values
• Vehicle values of any automobiles you own
• Other valuable property, such as jewelry, collectibles, and business ownership interests

2. List Your Liabilities

Next, make a list of your liabilities to calculate net worth. Include only true debts like those below, not recurring monthly bills or subscriptions:

• Auto loans
• Student loans
• Personal loans
• Credit card balances
• Medical debt
• Payment plans
• Mortgage balance
• Home equity loan or HELOC balance

3. Use the Net Worth Formula

The final step in calculating net worth involves adding up all your assets, adding up all your liabilities, and then subtracting the liabilities from the assets. The result is your net worth.

If the number is positive, you own more than you owe. If it’s negative, you owe more than you own. And if it’s zero, you’re financially balanced.

Simple Walkthrough of a Net Worth Example

Now that you understand the meaning of net worth and the formula, let’s look at a realistic example of a hypothetical person’s calculations. Note that only equity counts toward calculating net worth, so look at your home value minus your mortgage and your car value minus your car loan.

Assets:

• Home value: $250,000
• Savings: $15,000
• Retirement account: $40,000
• Car value: $12,000

Total assets: $317,000

Liabilities:

• Mortgage balance: $210,000
• Car loan balance: $8,000
• Credit card balances: $5,000

Total liabilities: $223,000

Assets totaling $317,000 – liabilities totaling $223,000 = $94,000 net worth

What Counts and What Doesn’t Toward Net Worth

It’s important to note that income doesn’t factor into how to calculate net worth. Income is a flow of money coming in over time, versus net worth, which is a snapshot of your financial value at a single moment. Income only affects net worth if it pays down debt or builds assets.

Monthly bills, such as rent, utilities, and subscriptions, aren’t part of the net worth formula either. However, include any loan balances because they are money you legally owe.

To calculate net worth, include your home and car, but use realistic market values to ensure your calculation is accurate. Subtract your mortgage to find equity, and conservatively estimate your vehicle’s value since cars depreciate.

Why Net Worth Matters

Learning how to calculate net worth is important because it gives you clarity that your budget alone simply can’t. Your net worth demonstrates your overall financial strength and can help you prioritize paying off high-interest debt, build emergency savings, make major purchase decisions, and increase your retirement contributions.

For these reasons, knowing your net worth can ultimately help you reach your investment goals, prepare for retirement, and live debt-free.

How Often Should You Calculate Net Worth?

If you’re actively working to pay down debt, consider calculating your net worth monthly. Otherwise, quarterly or twice-yearly calculations should be sufficient.

Pay attention to trends as you work through the net worth formula. Also, plan to update it after major life events, such as changing jobs, moving, or taking out a new loan.

Useful Tools to Track Net Worth

You don’t need an accounting degree or complex software to track your net worth. For simplicity and privacy, you can work through the net worth formula in a simple spreadsheet. You can also use mobile apps and digital banking dashboards that link your accounts and provide automated calculations.

Meanwhile, the “good enough” method may suffice for your financial purposes and only require tracking major categories, such as cash, home equity, retirement, and total debt.

Common Net Worth Mistakes to Avoid

Here are some common mistakes to avoid as you learn how to calculate your net worth:

• Using a purchase price instead of the current value
• Neglecting to include small debts like store credit cards and hospital balances
• Using your home’s full value without subtracting your mortgage first
• Overvaluing sentimental items that would be difficult to sell

Practical Moves to Boost Your Net Worth

When it comes to net worth, it’s your personal progress that matters far more than comparing yourself to anyone else’s number.

If you want to boost your net worth, you can increase your assets by building an emergency fund, utilizing 401(k) employer matching, and automating your savings and investments. You can also improve your net worth by avoiding lifestyle inflation, strategically refinancing, and paying off high-interest debt.

Tower Loan’s debt consolidation loans can be a useful tool to simplify your finances and avoid high interest rates as you build your net worth.

FAQ Related to How to Calculate Net Worth

Below are answers to the most common questions we receive about net worth meaning and how to calculate your net worth. If you have additional questions, please contact a local office near you.

You can also learn more and handle many loan-related tasks by using the Tower Loan app.

What’s a “good” net worth?

A good net worth is one that improves for you personally over time. Rather than comparing yourself to others, focus on your personal growth and stability at your current and future life stages.

Is it normal to have a negative net worth?

Yes, it is common to have a negative net worth, especially if you recently bought a home or have student loans. Many young adults have negative net worths. However, the more important thing is to use your net worth to establish a plan for upward financial mobility.

Should I include my retirement accounts in my net worth calculation?

Yes, retirement accounts are considered assets and should be included in the net worth formula.

Do I count my house as an asset if I still have a mortgage?

Yes, but only the equity counts if you have a mortgage. To calculate net worth, simply subtract your mortgage balance from your home’s value.

What’s the difference between net worth and net income?

Net worth is the calculation of what you own minus what you owe. However, net income is the amount of money that you take home in pay after taxes and deductions.

How do I estimate the value of my assets accurately?

To account for all your assets, make a list of all current account balances, conservatively estimate the value of vehicles you have, and reasonably estimate your home’s value based on local market comparisons. Your exact numbers don’t have to be perfect, but staying consistent and reasonable will ensure the best possible accuracy.