Net Worth: How to calculate, manage, grow

By Jon Scott

Forbes has become popular for its listing of the world’s richest individuals via net worth. However, the definition of net worth is a very holistic measure of wealth, and much different than what most people consider when they think of a wealthy person. Someone with a large net worth can have zero or even negative money in their checking account. Similarly, someone could have millions in their bank account yet have a negative net worth. This article breaks down what net worth really means.

How much are you really worth? That question is actually hard to determine–without some help. However, there are a number of options to help make this calculation a little easier.

First, we’ll need to know the equation for net worth which is:

ASSETS - LIABILITIES = NET WORTH

Now let’s talk about assets and liabilities:

This list doesn’t include everything, but you can consider everything that can be converted to cash as an asset, and everything that needs to be paid as a liability.

How to track your net worth

The good news is there are many ways to track your net worth. One option is through a software specifically made to track your net worth:

Mint

Mint is the most downloaded personal finance app. Mint allows you to sync your various accounts in one app, and see your net worth in real time. For example, you can link anything from your checking account to your 401K to your Mint account. In addition, Mint will track your spending categories and allow you to set budgets–all for free.

Personal Capital

Personal Capital also allows you to track your accounts for free. Users can access a financial dashboard that allows the user to see all their finances in a single view. Personal Capital includes robust budgeting, cash flow, and investment tracking. Lastly, Personal Capital offers the option of speaking to a licensed fiduciary advisor who can help you invest–something Mint does not offer.

Tiller

Tiller is a financial management tool that creates a spreadsheet-based system that syncs with your bank account. Users are able to create highly customized spreadsheets in order to view their financial status, and also create spreadsheets gaming out hypothetical financial situations.

Excel

There are many different options to keep track of your net worth in excel. This can be as simple as taking all your assets and liabilities and entering them into excel and updating them, or using Tiller to create new spreadsheets over time. If you need some inspiration on how to track your net worth via excel, check out some of the options via this Google search.

How to measure liquidity?

Liquidity is the portion of your net worth that is currently in cash or can be converted to cash quickly. Examples include money in your checking/saving account, stocks, and bonds. Non-liquid net worth items include cars and home(s). To measure liquidity, calculate the total cash in your checking and savings accounts, as well as your total investments. At minimum, you should have 3-6 months worth of liquid living expenses in your emergency fund. You can find more on how to create an emergency fund in this article.

What does my net worth mean in terms of my financial health?

First and foremost, net worth tells you how much money you really have. An individual with a large house, several cars, and other luxurious items can have a negative net worth–meaning they owe more money than they have. If you have a low or negative net worth, you’ll be forced to continue to work to pay off your liabilities. Being aware of your net worth will help you make better spending and investment decisions. Though having a negative net worth isn’t particularly a bad thing–especially when young–it is important that you are taking steps to increase your net worth.

How to reduce your liabilities

One way to reduce your liabilities is to reduce your expenses. You should be making your purchases via credit card–which increases your liabilities–however you should be paying off your credit card monthly, and have plenty of cash to cover these liabilities when incurred. Paying your credit card statement balance (or total balance) each month eliminates the costly APR charges that occur if you do not pay your statement balance each month. Reducing the amount of spending overall will leave more cash available each month that can be saved or invested.

In addition, you should aim to reduce your tax liabilities as well. There are many ways to do this, but one method that reduces your tax liability is to invest the maximum amount allowed in your 401K and HSA (if applicable). Lastly, you will want to stay away from any personal loans, buy now pay later, or any other sort of loan with an APR in double digits.

In addition, you will want to prioritize paying off debt. As a summary you should pay off your highest interest debt first. You should also prioritize paying off debt such as mortgages and car loans.

Purchases and investments that increase your net worth

As you progress through your career, your net worth should increase. The median net worth for 20-something is $7,987 while the median net worth for a 40-something is $170,767. This is due to several reasons including making more money via an increased salary, increased savings, and the increasing value of your investments. For example, let’s say you buy a house in your early thirties for $300,000. The average housing price appreciation rate per year since 1991 has been 4.4% per year, which means 10 years in your house will be worth $461,451.69. Now, you have to consider the mortgage payment as part of your liabilities and whatever other liabilities you accumulated in that period, but the increase in your home would be more than $161,000 alone.

Another common factor that will increase your net worth is the growth of your 401K and HSA accounts. A 25-year-old who invests $5,000 a year in their 401K for 43 years with a 8% average annual return will accumulate approximately $1.65 million. A family investing the max amount in their HSA each year over a 30-year period ($7,750 in 2023) with a 7% return will have more than $1,000,000 in HSA dollars. The total cash amount invested would be around $320,000 with investment growth accounting for the remaining amount.

Lastly, you will want to invest outside of your 401K and HSA. You will want to build a diversified portfolio. Crucial investments include investing in an ETF such as the Vanguard VOO and VTI indexes as well as some allocation to bonds as well.