How Do You Calculate Net Worth?

Knowing your net worth is an important part of managing your finances. Like your credit score and credit utilization, your net worth shows how healthy your finances are and where you can improve.

But how is your net worth calculated? And what does this number really mean?

What Is Net Worth?

Net worth is the difference between your assets (valuable things you own) and your liabilities (your debts). If you have more assets than liabilities, then you have a positive net worth. It's also possible to have a negative net worth if you have more liabilities than assets.

A positive net worth indicates you're in good shape and better positioned to face financial challenges. A negative net worth suggests you may be carrying too much debt or not investing enough.

What Are Assets and Liabilities?

An asset is anything that has financial value. Think of it this way — an asset is anything that could be sold to increase your monetary wealth. Some common assets include:

• Money in your checking and savings accounts
• Bonds or certificate accounts
• Mutual funds
• Stocks
• Retirement accounts
• Life insurance policies
• Owned real estate (like a house or rental property)
• Art, antiques, gold, jewelry, and other valuables

Liabilities, on the other hand, are debts. Most people — even very wealthy people — have some liabilities. Having liabilities is not a problem as long as those liabilities are managed well and do not exceed your assets. If your liabilities do exceed your assets, it's time to focus on paying down debt and investing more of your wealth into assets with a good return. Some of the most common liabilities people carry include:

• Credit card debt
• Mortgages
• Auto loans
• Student loans

How Do You Calculate Your Net Worth?

Determining your net worth isn't complicated. Once you have all your financial documents ready, just use a simple equation to calculate it: total assets - total liabilities = net worth.

To calculate your net worth, follow these simple steps:

1. List all your assets and their current value. Your assets include your current checking and saving account balances, certificates and money market accounts, retirement accounts (IRAs, 401(k)s, and SEPs), any stocks and bonds you have, and the value of your home and cars. You can also include other physical assets such as jewelry, art, and collectibles if you want to be more accurate. Once you have a complete list, add up the value of all your assets.
2. List all your liabilities and their totals. Your debts include what's left to pay on your mortgage, student loans, car loans, credit card balances, personal loans, and any other ongoing debt. When your list is complete, add up the value of all your debt.
3. Subtract your total debts from your total assets. The number you get is your net worth. (Remember, this may be a negative number if you carry more debts than assets.)

Let's look at a more concrete example: A recent college graduate with $2,000 in savings, $15,000 in student loan debt, and $500 in credit card debt. Their total assets are the $2,000 they have in savings. Their liabilities amount to $15,000 in student loans and $500 in credit card debt, with a total of $15,500. When we subtract these liabilities from the assets, we get a negative number, -$13,500. This is not an uncommon situation for young people who are just starting out.

Average U.S. Net Worth by Age

Want to know how your net worth stacks up against the national average? A 2019 study by the Federal Reserve suggests the average net worth of Americans by age. Here's the breakdown:

Now let's also consider our graduate's parents. They own a home worth $150,000, have $15,000 in savings, and have $100,000 in retirement. These are their assets. However, like their child, they also have liabilities, including $75,000 left to pay on their mortgage and a credit card balance of $5,000. If we add up their assets, we get $265,000. So, their total liabilities equal $80,000. This means their net worth is $185,000.

Our financial situations can change a lot as we get older and have more work history, earn promotions, and get raises, so it's normal for someone in their twenties to have a much lower net worth than someone in their fifties.

The Takeaway

Knowing how to calculate your net worth — and keeping track as it changes over time — removes doubt about how you're doing financially. If your net worth is negative, you know it's time to pay down debt, possibly by paying off your credit cards or student loans. If your net worth is positive, then you know you're on the right track. Either way, calculating your net worth will help you set worthwhile financial goals.