What’s your worth? It’s a relative concept.
After all, there’s your self-worth — you can’t put a price on that. And there’s your market worth in places like the job market, where you might command a higher salary if your skills are in high demand. But there’s one type of worth that everyone has. A clearly defined objective, number.
You probably don’t know it off the top of your head, simply because you’ve probably never done the math. It’s your net worth.
Your net worth is what you own minus what you owe.
Everyone has one. It might be massive like Elon Musk or Jeff Bezos, or more likely it’s a more modest figure. In fact, your net worth might seem pretty worthless at a glance. Especially if you’re on the younger side, it could even be negative.
But don’t worry, your net worth doesn’t mean you’ve failed to define your financial future. Sometimes you’ve got to invest in yourself before you see the returns.
Let’s break down exactly what your net worth means, how it impacts your financial outlook today, and what you can expect as you age.
How is net worth calculated?
When it comes to your personal finances, your net worth is the value you get when you subtract your liabilities from your assets. It may fluctuate day to day or even moment to moment, depending on your financial situation.
Your liabilities are the things you owe money on. If you’re still paying off your car, your home, or your student loans, these would fall on the liabilities side of the balance sheet. Any type of debt is a liability in terms of your net worth, even your credit card.
Future recurring payments like your Netflix subscription don’t count as liabilities. In fact, if you’re a renter, most common net worth calculations don’t include your rent payments either. But if you’re responsible for court-mandated payments like tax liabilities or alimony payments, those will count against your total.
On the other hand, your assets are what’s legally yours. This can be the cash in your bank accounts or cash you have stashed, any stocks and bonds in your investment portfolio, your retirement accounts, your car, your furniture, artwork, jewelry — from material possessions to intellectual property of value. Anything that you could sell for monetary value (even if those funds wouldn’t be immediately liquid) is an asset.
Just like future rent payments are part of your liabilities, your future salary isn’t part of your net worth. Only money you’ve actually earned, not expected income.
Add it all up, then subtract your liabilities. That’s your net worth.
Keep in mind, some items may fall on both sides. For example, if you’re a homeowner, your outstanding mortgage debt would be a liability, but the amount you’ve already paid down (also known as the equity you’ve built in your home) would be considered an asset.
The exact calculations can be complex when you’re trying to list your entire life on a balance sheet. But for the purpose of illustration, here’s a simplified hypothetical.
Sample net worth calculation: It takes three basic steps.
How is net worth calculated? Just follow these simple instructions.
List out all your assets.
List out all your liabilities.
Subtract to find the difference.
Let’s say our mutual friend, Annette Worthington, has $10,000 in a savings account. Her 401(k) retirement account is up to $20,000. She also keeps $5,000 in her checking and another $3,000 cash in an emergency fund. She owns her car, which has a current blue book value of $7,000. She also finally paid off her student loans (way to go, Annette), but she got a mortgage loan to purchase her $200,000 home — with $150,000 still remaining on her mortgage. Plus, she’s got $2,000 in credit card debt she hasn’t paid off yet from last month.
Here’s how our (again, overly simplified) net worth calculation would go.
$50,000 home equity
= $95,000 in total assets
$2,000 credit card
= $152,000 in total liabilities
Annette’s net worth:
$95,000 in assets
$152,000 in liabilities
= negative $57,000
This is why you shouldn’t stress if you have a negative net worth. Look at Annette’s life. She’s doing pretty good. She’s a homeowner. She doesn’t carry any other major outstanding debt, and she’s already starting to save for retirement, with money put aside now for a rainy day, too.
Sure, at this moment in time, her net worth may be negative. But her future is bright, and yours can be too.
Why is net worth important?
If you can have a negative net worth and still be on the right track, then what’s all the fuss about? Your net worth is important because it gives you a more holistic look at your financial health. The simple exercise of adding up everything you own and everything you owe (in far more painstaking detail than we did for Ms. Annette Worthington above) can help you get a detailed picture of where your finances stand. And, quite frankly, how well you’re positioned to reach your financial goals.
You might think a high income is what matters most when it comes to someone’s personal finances. However, a salary only tells part of the story. Just like you don’t evaluate a business’ health based on their revenue alone. Having a high income may not mean you’re financially healthy. If this business requires higher-than-normal expenses to bring in high revenues, it may not be a profitable venture. For all you know, the entire business model could be broken.
In your personal finances, too, your net worth is a reflection of your financial sustainability. It’s your bottom line. Your income plays a role, but your habits and lifestyle do too. If you’re an avid gambler, a stress shopper, or you wish your local divorce lawyer had a punch card loyalty program, your high income may not accurately reflect your financial picture going forward. Debts can take many forms and add up quickly — more so when you owe interest on unpaid debts.
That’s why the number that matters for your net worth isn’t where it stands at any given point in time. It’s how your net worth is trending over time. Tracking your net worth in the form of a regular net worth statement over time can help you make smarter, more informed financial decisions and keep a pulse on the money coming in and out of your life. So you can set realistic goals and reachable targets for your future.
When you take this big picture net worth approach — understanding and sizing up both your assets and liabilities — you can figure out ways to make your money work harder. For example, if you have savings sitting an account on the assets side of your balance sheet that isn’t growing at a high rate, but you also have a loan with a really high interest rate on the liabilities side of your balance sheet, it would make sense to use the money in your savings to pay off the loan now vs. losing money in interest payments over time. Liquidating your laziest assets to pay off your most urgent debts is the net worth approach to building wealth in the future.
NOTE: Your net worth is mostly a metric for you to track for your own benefit. Lenders, renters, and other people who make financial decisions in your life may sometimes ask you about your assets, but no formal net worth calculation goes into your credit score. In fact, your credit score is completely independent of your income, account balances, investments, and other wealth indicators. Rather, it’s a metric of your reliability to repay debts based on information gathered from your history — including repayment history, collection accounts, bankruptcies, tax liens, and other public records.
How to increase your net worth.
Since your net worth is somewhat of a moving target, changing as fast as your Bitcoin wallet fluctuates, you want to see your net worth and overall wealth trending in the right direction.
Based on the simple “Assets – Liabilities = Net Worth” formula, there are only two ways to increase your net worth. You can either increase your assets or decrease your liabilities.
Easier said than done, right? Here are few practical tips for how to increase your net worth on both sides of your balance sheet.
Tips to increase your assets at any age.
Cut back on expenses and automate your savings.
The money you spend may actually contribute to your net worth — if you’re buying something of long-term value. Though the majority of day-to-day spending goes towards purchases that won’t become an asset. While groceries and nights out at restaurants may be vital to survival, the money you spend on food doesn’t have the staying power to fatten up the asset side of your balance sheet.
A PFM (personal finance management) tool like Mint can help you track your expenses and see where the majority of your money goes — including the things you can categorize into non-net-worth building activities like dining, entertainment, and transportation (your car itself, included). If you realize you can cut back in your budget, you can have a portion of your income automatically deposited into a savings account. If the money never hits your checking account, you’ll miss it less. And it can help to take the sting out of saving money and building your net worth when you’re just getting started.
Max out your retirement savings.
Saving for retirement is a great way to boost your net worth because the money you save gets to grow with tax advantages — either tax-deferred (which means your money is taxed later so there’s a larger amount to earn interest upfront) or tax-free (because you pay income tax upfront but get to avoid capital gains taxes on your earnings), depending on the account type you choose.
Like automating your savings, your retirement contributions can be directly deducted from your paycheck, especially if you have a 401(k) retirement account through your employer. Plus, if your employer offers a percentage match for your 401(k) contributions, that’s money outside your salary that you can vest as retirement savings. You can also open up an Individual Retirement Account (IRA) on your own that’s not tied to an employer in any way. Traditional IRAs enjoy tax deferred earnings, while Roth IRAs are tax-free.
There are limits to how much the government lets you contribute to both 401(k) and IRA accounts because of the special tax advantages each account gives you. Maxing out your contribution limits lets you build the most possible net worth (with huge boosts thanks to compound interest as the decades past). Not to mention, a 401(k) also offers some protection against creditors in case your finances take a turn for the worse later — safeguarding your overall net worth and letting you hold onto some assets.
Start investing and earning interest.
Cash is king. But not when it comes to net worth calculations. Yes, it makes sense to have some cash on hand in case of emergency. But your cash can contribute more to your net worth when your money is earning more money. If you’re keeping too much cash in your emergency fund, consider re-allocating some of that money to a high-yield savings or investment account.
Unlike a retirement savings account, you’ll be on the hook for more taxes in a regular investment account, but those taxes come out of money you earn — putting you ahead in the aggregate. You should expect close to a 6% return each year if you invest wisely in the stock market (with some ups and downs from year to year). A high-yield savings account is a lower risk alternative, but you can only expect a return closer to 2%.
Talk to a financial advisor to see what kind of investment strategy makes sense for you. And you can even get set up with robo-accounts that handle the actual investing for you. All you have to do is fill out your appropriate risk profile.
Renting is great for the convenience. It makes less sense for your net worth. That’s because while buying a home for most people will require a mortgage (a huge liability!), as you pay off that mortgage you build equity in your home. Unlike rent money, which for net worth calculation purposes you might as well be lighting on fire each month, that equity grows over time and shows up on the asset side of your balance sheet.
Once you’ve paid off your home in full, as one of your largest purchases it will become one of your most valuable assets. So while mortgage debt will hurt your net worth in the short term, it drives you towards positive net worth in the long term. If you’re paying a $1,000 per month in rent, after 30 years you would have paid $360,000. If you’d put that money towards a 30-year mortgage, you’d have paid off the full value of your home and have that money in equity to show for it (minus interest).
Add passive income streams and purchases that appreciate.
Passive income is a revenue stream that you don’t have to actively work for — it’s not part of your salary, rather from a rental property, royalty checks, or other sources. Like your home, real estate investments can help you grow your net worth in the long term. However, unlike your home, you can lease the space and charge rent for a short-term income supplement. If you can charge more in rent than you’d be paying per month, you’re already cash flow positive.
Like real estate, art is another popular purchase to grow your long-term net worth. Paintings, sculptures, and other collectibles appreciate in value over time.
Just make sure you’ve done your due diligence before you get into real estate or art investments as these are illiquid assets — investments that are tougher to sell and get out of. And appreciation for both property and art can often be a slower, gradual build.
Protect the valuables you already have.
Asset protection is a type of insurance coverage to look out for the valuables you own. This is less about increasing your net worth. It’s how to avoid a sudden, unexpected decrease.
Your antique furniture may be worth $10,000. Your broken antique furniture? Far less than that. Asset protection covers the cost it takes to repair or replace, lost, stolen, and broken items. But don’t just think antiques. In the short term, your net worth also includes your phone, computer, and electronics — all of which you can cover with an asset protection plan.
Tips to decrease your liabilities at any age.
Pay ahead on your debt whenever possible.
If you have extra money now, use it to get out of debt as soon as possible. Getting out of debt is the fastest way to increase your net worth. You also save on interest you would’ve owed on your loan over the life of your terms.
High-interest loans can have a negative effect on your net worth for years, and it can be really tough to get out from under payments. It also makes it tough to save for your future and build assets when so much of your income is going toward paying off debts. Also, make sure you’re paying off your credit card debt within your grace period whenever possible and not paying interest on your credit card purchases. Credit card debt can spiral fast. Stay on top of it.
Consider consolidating your debts.
If you have multiple loans and it’s tough to navigate your payments, consider a debt consolidation loan to give you a more manageable monthly payment. You may also be able to lower your rate, so you’re on the hook for less interest.
At the very least, consolidating your debt makes it easier to track so no payments slip through the cracks. If you do decide to consolidate your debt, just make sure you’re not going to end up paying more interest overall on longer terms. Remember, the goal of taking on debt is to be able to get out of debt as soon as possible. A lower rate is great, but not if costs you more in the long run.
Refinance your home mortgage.
Because your home is such a major purchase, it can have a massive impact on your net worth. As a result, refinancing your home can also cause your net worth to go up or down quickly. If mortgage rates go down and you’re able to refinance to a lower interest rate on the same term length, or if you’re able to shorten the terms on your loan, you can build equity (and your net worth) faster.
However, if you tap into your home equity to get funds for other purchases (borrowing more money against the equity you’ve built in your home), you’ll have the opposite effect on your net worth.
How do you compare? The average net worth by age.
Again, net worth is a sliding scale that will fluctuate over the course of your lifetime. There is no right or wrong net worth. The average net worth by age varies. It’s simply a figure that helps you quantify and make sense of your personal wealth. More is obviously better, but at times, you’ll have to take a step back in the short term to move forward.
Still, in general, you can expect your net worth to grow over time as your income increases, some of your debts fall by the wayside, and your financial needs change. Here’s a look at the average net worth by age group, as measured by the Federal Reserve Board’s Survey of Consumer Finances — as well as a few financial considerations at each age.
Average net worth in your 20s.
If you’re in the negatives, you’re normal. What’d you expect? In fact, the Federal Reserve Board Survey of Consumer Finances doesn’t even release specific data for this age bracket. In our 20s, most of us simply aren’t going to have much net worth to measure. Once you factor in the massive amounts of student loan debt and relatively low earnings fresh out of school, breaking even would be way ahead of schedule to reach your ultimate financial goals.
According to the The College Investor, at age 22 (for the Class of 2019), the average net worth was -$38,915. By age 30 (for the Class of 2011), that number drops down to -$1,989. With the Class of 2010 finally reporting a positive net worth age 31.2
Financial considerations in your 20s:
Open a retirement savings account. Like right now, ASAP, today. Time is the one asset you can’t replenish when it comes to retirement savings. And compound interest is your best friend. A decade makes literally hundreds of thousands of dollars in difference by the time you reach retirement age. You may be negative now, but your future net worth will thank you.
Start a savings account and start putting money away for the unexpected. Your 20s can be unpredictable — but it’s time you at least start putting money away even if you’re not saving for anything specific yet.
Do more than just save. Start investing. Again, compound interest. It works for investment accounts as well. The sooner you start, the more time you have to reinvest your earnings and let compound interest work in your favor.
Don’t forget about your credit score. It’s not tied to your net worth directly, but it’s important for your major life purchases, like when you want to get approved for a mortgage or a loan and get a better rate.
Pay down your student debt as soon as you can (well, again, pay down ALL your debt as soon as you can), but if you’re in your 20s, student debt is probably the most pressing.
Average net worth under age 35.
The first half of your 30s is where your net worth finally starts to shift positively. The Federal Reserve Board measures net worth two ways: the mean net worth (the mathematical average as you most likely think of it and the median net worth (the mid-point of all net worths for the age group, which is less affected by outliers who bring up or down the average score). As the midpoint, the median is the more accurate representation of a typical American’s net worth at each age group.
The data also applies specifically to families, not individuals, as grouped by the age of the “head of family.”
For families with a head of family less than 35 years old:
Mean net worth — $76,300.
Median net worth — $13,900.
Financial considerations from 31 to 35:
If you built good credit in your 20s, this is when it should be paying off — most noticeably in your home mortgage. Be sure to shop around for a mortgage that fits you and your family. It’s a huge life decision and will be have a major impact on both sides of your net worth balance sheet over the coming decades.
Getting out of debt should still be priority no. 1. If you haven’t finished paying off your student loans, it’s time to put that chapter of your life in the rear view. And don’t forget to pay down any other loans like your auto loan, too.
Average net worth age 35 to 44.
Here comes your first big jump in net worth. As you get more established in your career, you’re starting to reach new levels of earning potential. You very likely have a mortgage payment at this point, but your family is also building equity after making mortgage payments over a few years now. You’re balancing higher income and more assets with more liabilities as new responsibilities of mid-life adulthood take shape.
For families with a head of family between 35 and 44 years old:
Mean net worth — $436,200
Median net worth — $91,300
Financial considerations from 35 to 44:
Keep paying ahead on your mortgage and building equity faster; it’s also saving you a lot of money interest.
As real-life responsibilities mount, so can convenient but expensive credit card debt. Be sure to stay on top of it and pay this off as soon as you can (within whatever interest-free grace period your credit card company gives you).
Your expenses may be adding up fast, especially if you have kids, but don’t forget about your retirement savings — you’ll only be shortchanging yourself if this is where you decide to cut back
Speaking of kids, remember that student debt you paid off? Yeah, education is expensive. It might be time to start thinking about your children’s education (so they can get a head start on a positive net worth sooner than later)
More responsibilities in life means more people to look out for — you may be at an age where you should look into life insurance. It won’t do much for your net worth, but it can look out for the long-term security of your family and keep their assets afloat in the event you’re no longer around to provide for your family.
Average net worth age 45 to 54.
Another major step up in net worth as you enter the back half of your highest earning years. Your career is most likely in full swing at this point — hopefully with a few key promotions along the way — and you should be building serious home equity and lowering your mortgage principal.
For families with a head of family between 45 and 54 years old:
Mean net worth — $833,200
Median net worth — $168,600
Financial considerations from 45 to 54:
If you’re near the top of your earning potential in your career, you should definitely be maxing out your 401(k) and IRA contribution limits too. Contribute as much as you can, and remember, if you hit your 401(k) limits, you can still open a separate IRA or Roth IRA.
You might have kids in high school by now and about to go to college. Even if you saved enough to cover the whole ride, don’t forget to look into financial aid options. If you end up paying less in college tuition, that’s money you can put towards getting ahead on debt or investments.
One more quick callout for life insurance — rates start to rise more as you enter your 50s. Getting a fixed, lower rate may make more for a better price on your peace of mind.
Average net worth age 55 to 64.
This is where median net worth starts to level a bit. You can still expect significant growth, but it’s a bit more gradual from here on out. Mean net worth takes another big jump, likely boosted by families that planned ahead for retirement savings as compound interest starts to play a major factor in the final years of eligibility for 401(k) accounts.
For families with a head of family between 55 and 64 years old:
Mean net worth — $1,175,900
Median net worth — $212,500
Financial considerations from 55 to 64:
Get rid of all your debt the best you can. You’re rapidly approaching retirement age — that means no more income, you’ll soon need to live off your existing assets and earnings.
Getting rid of all debt includes paying down as much of your mortgage as possible. Not only does that make for one less major expense on a limited-income retirement budget, if your family decides you no longer need the space or retire elsewhere, you can cash in on more home equity when you sell.
Contribute the max to your retirement savings. Once you hit age 50, federal law increases how much you’re allowed to contribute to both to 401(k)s and IRAs in the form of “catch-up” contributions.
Average net worth age 65 to 74.
You’ve finally reached your peak net worth in this age bracket, with your final years of compound interest kicking in before the typical retirement age of 67 (though you aren’t required to start making distributions from your 401(k) until 72). Soon you’ll stop saving for retirement and start living off your retirement savings. Even if you don’t increase your liabilities, you’ll slowly start decreasing a major contributor to your total assets. But by this point, you should have enough put away for a comfortable retirement.
For families with a head of family between 65 and 74 years old:
Mean net worth — $1,217,700
Median net worth — $266,400
Financial considerations from 65 to 74:
If you’ve planned well for retirement and can afford to wait, put off collecting your social security benefits until age 70 to ensure you get the maximum benefit. Like salary, this doesn’t factor into your net worth, but it can serve as a supplement to your income during retirement.
Medicare benefits start at age 65 and you won’t have employer-sponsored insurance when you’re older. Your healthcare needs and expenses are only going to increase as you age. Explore your full range of Medicare options to make sure you have the coverage you need — from Original Medicare (basic minimum coverage), to Medicare Supplement, to Medicare Advantage, which can bundle your services for out-of-pocket costs and additional coverage.
Average net worth age 75+.
Your net worth will likely start to decline after age 75. But don’t be alarmed, this was the point of all that saving. You can’t take your assets with you, and you shouldn’t have many (if any) liabilities left on the books. Enjoy your golden years.
For families with a head of family over age 75:
Mean net worth — $977,600
Median net worth — $254,800
Financial considerations age 75+:
Protect your legacy and make sure you leave your assets to the beneficiaries of your choosing. An estate planner can help you make sure everything is taken care of.
Continue to map out your budget to make sure it’s consistent with your remaining retirement savings. Your nest egg needs to last, and for a lot of people, that means lifestyle changes later in life.
It never hurts to know your net worth, no matter your age. Taking the net worth approach to evaluate your finances lets you use the right assets you address the right liabilities, and create more opportunities like passive income. It’s more thorough, thoughtful way to evaluate your finances that can help you make the most of your money — not to mention, all the other things of value throughout your life — going forward.