Law #10: Know Your Net Worth
The Law
Net worth is probably the least pursued of the three numbers you need to know to keep your financial health in good shape. Everyone has heard about checking your credit score. Many have considered or thought about retirement even if they don't put much time into it. But what about your net worth?
Your net worth has very little to do with how much you earn. Instead, it's the difference between your assets and liabilities. That is, the difference between the things you own that have value and all the debt you owe, including credit card balances, mortgages, and student loans. Add tracking your net worth to your focus immediately to keep tabs on your financial health. Know how to calculate it and understand why it matters.
Your Keys to Power
What is it? So you’ve probably heard of “net worth,” but what does it mean? Let's get some mindset issues out of the way. You'll hear some people say things like, "Your net worth doesn't tell you who you really are." "Your net worth isn't your self-worth." "Don't spend your precious time focusing on net worth." "Don't let any number define who or what you're worth."
We get the point that people who say these things are sharing. We want you to have confidence in yourself, respect, and love for yourself regardless of where you're starting this journey. We’ve said it often, and we'll repeat it—it's perfectly acceptable to be a work in progress and a masterpiece simultaneously. But the key is to do the work. Your net worth actually does matter quite a lot.
This isn't the time to let people get all fancy with language and start rewriting definitions for things because it feels too tough to handle. You'll see a lot of wordplays if you start googling "net worth" on your quest to reach a more solid financial foundation, but don't get sidetracked. A negative net worth matters. We're not going to redefine net worth as anything other than the financial matter it is—your assets minus your liabilities. Don't let the "worth" part of this financial concept give you a case of the feels.
You want a positive net worth because a negative one has harsh finical implications. Think about it. If you owe $200,000 and have $50,000 of assets, you have a -$150,000 net worth. What does that really mean, though? Essentially, it means that if you couldn't continue working or if something happened that caused you to lose access to earning money, you could risk losing absolutely everything you have with no way forward. Net worth is essential. It's not everything about who you are, but it is a vital part of your financial picture.
How do you calculate it? You need two numbers to calculate your net worth. First, you need the total of all assets. Second, you need the total of all liabilities. Then you subtract those numbers.
Total assets - Total liabilities = Net worth
Let's investigate how we get to each of these two numbers.
Total Assets - calculating total assets may not be entirely straightforward, depending on the types of assets you own.
To figure out the total of your assets, consider the total value of everything—bank accounts, investments, real estate, cars, boats, money market accounts, CDs, stocks, bonds, 401(k) accounts, and anything else with financial value, even your jewelry.
If you can get an appraised value for the item, use that number in your tally. For instance, you can look up the value of a car using Kelley Blue Book, and real estate has an appraised value on your property tax statement.
You'll need to make an educated approximation for anything that doesn't have an appraised value. Be conservative so that you can calculate a meaningful net worth figure. You may think that a diamond ring is worth more than it's worth because of sentimental value, but estimate lower than your gut instinct or take it to an appraiser if you have access to one.
Total Liabilities - calculating liabilities may be a bit more straightforward because you’ll often have access to creditors' statements. Just make sure to list everything that you owe.
Include personal loans, student loans, car loans, mortgages, credit card debt, medical bills, tax debt, and any other outstanding debts.
If you have business debt tied to your personal assets, for instance, if you took out a personal loan or used personal credit cards to fund your business, include that debt.
Pull statements from credit card, loan, and mortgage companies to get accurate numbers. These statements will show you how much you still owe on the debt.
Once you have a total amount for assets and the total amount for liabilities, the math is elementary. Subtract liabilities from assets using this formula:
Total Assets - Total Liabilities = Net Worth
Use an online tool. If the thought of tracking your net worth turns your stomach upside down, you still need to do it, but you can get help from some tools that try to take some of the thinking out of it. Online tools like this, this, and this will guide you through the process if you need some assistance calculating your net worth. Note that you'll still need to keep a journal or some type of tracking system for your net worth calculations at various points in your life. These tools are online calculators that don't store your data but instead spit out a figure based on what you input. As always, when using a device to calculate critical financial data, be careful where you do it and ensure that your device is secure.
Practical Application
Learn how to do the work. Do you remember back in school when you had to show your work in math class? Or when you had a perfectly good calculator on your desk, but you still had to learn to do long division and show your professor how you did the work yourself with a pencil and a sheet of paper? Bring that lesson here. Learn how to calculate total assets and liabilities and get to your net worth figure on your own so well that you can do it without an online tool or an app. Of course, use your calculator to total your assets and liabilities and subtract one number from the other, but you want to understand the components that go into assets versus liabilities well enough that you can get to the bottom of it with just a calculator, a sheet of paper, a pen, and your statements. The better you know what goes into the asset versus liability columns, the better you'll think through these things on your feet.
Keep a journal. Your net worth could change from minute to minute, day to day. If some of your assets are tied to the stock market, real estate, or other investments, their values fluctuate. As you make payments on liabilities, they reduce. Any net worth figure you calculate is merely a snapshot of that moment in time. Make sure you keep a journal of your net worth over time, at various checkpoints throughout your life, track it, and then focus on increasing it over time.
Avoid the "all flash, no cash" syndrome. Some people have mastered the art of looking like a million bucks with nothing in their pockets. Having a lot of amazing things, at the end of the day, means very little if everything you own is leveraged or has a loan associated with it. Some people use credit to such an extent they look incredible but have an immensely negative net worth. Avoid being that person, and steer clear of those people if being around them makes you want to act similarly with your money. This is not a healthy financial strategy, even if it feels good at the moment.
Fight like hell to avoid a negative net worth. A negative net worth means you owe more money than your assets are worth. This could be a foundation for financial disaster. You could quickly lose everything that you have inside of a year if you get to a point where your net worth is so negative that if something happens, you can't keep things afloat.
Master your cash flow. Always know how much money is coming in and how much money is going out. Keep tabs on that, be careful with it, and stay within budgets.
Stay away from debt you don't need and can't afford. One of the best ways to maintain your net worth is not to take on unnecessary debt, particularly for things you don't need or don't provide you with cash flow. Taking on debt for a pair of shoes you're dying to wear to an event vs. a computer that will help you earn $3,000 a month are two very different ways to leverage debt. Think twice about any debt that doesn't build your net worth through cash flow.
Save consistently. To accumulate assets, you have to save money. One of the best ways to increase your net worth is to increase your savings. Sometimes, you may spend some of what you've saved to acquire an asset, and that's OK as long as you're strategic.
Consider investing your money in an asset that appreciates. One of the simplest ways to invest your money in something that appreciates if you are employed is to contribute to your employer's 401(k) plan. You could also consider investing in index funds, but if that is outside your current knowledge base, that's OK. Strive to learn how to invest your money, but start with what feels safe and comfortable for you. A 401(k) retirement plan is a great way to go if you're with an employer that offers one.
Set targets. Wherever you're starting, set targets. If you’re starting with a negative net worth, start by setting a net worth target of $0. Starting at $0 may not sound particularly significant, but if you're currently at a negative $20,000 net worth, that'll be pretty significant. From there, attack higher targets year by year. Check this source for some industry average targets for net worth at various ages, but don't get boxed in by these numbers. Shoot higher if you can, but be realistic.
Do this with a buddy. Accountability is everything, especially if money isn't your thing. If you're in a relationship, your accountability buddy may be your romantic partner. If you're not partnered or handle things like this separately from your partner, find an accountability partner to take this journey with you if that inspires you. It may be interesting to work with someone going through similar struggles as you with whom you feel you can relate, or it may be wise to find someone in a stronger financial position willing to work with you and help pull you up. Whoever you team up with as an accountability buddy, make sure you bring something to the table for them, too. The person may seek to mentor or help you because they really care about you and because it feels meaningful to them, but remember to be highly respectful of their time and find ways to feed their soul as well.
Hustle. Don't be afraid of a good side hustle. If increasing net worth is a matter of reducing debt and increasing assets, a good side hustle can help you tackle both. If you have debt, making extra money to pay down that debt more quickly will help your net worth increase. Similarly, making extra money you don't need to spend means you can put it into savings, which also increases your net worth.
Seek passive income. For many, the increase in net worth over many years is often the result of passive income. There are several ways of earning passive income, from investments to compound interest to real estate investments. This issue isn't designed to dig deeply into passive income, but be on the lookout for future posts where we'll explore the various ways of building a diversified set of passive income streams.
Pass it on. In a world where we don't learn things like this in most schools, community organizations, and sometimes not even at home, when you do learn something like this, pass it on. If this is your first time hearing about net worth, or if it's your first time understanding it, find someone else to share this with.
Authority
“Millions wish for financial freedom, but only those that make it a priority have millions.” - Oscar Auliq-Ice
“Make use of your network, but don't make your network feel used.” - Olawale Daniel
“Every man from his worth can build and increase his net worth.” - Sunday Adelaja
“Wealth is a mindset; so is poverty, what you know or don't know, your perspective of life and beliefs have a direct connection to your net worth.” - Lucas D. Shallua
Our Vote
I love some accountability. At this point in my life, I serve as a mentor for several individuals regarding personal financial matters. I believe in holding them accountable, but I also believe in holding myself accountable. I track my net worth regularly, and I set goals for myself. I respect where I am in the financial journey at each check-in, and I love the opportunity to track whether I'm staying on course.
We all waiver from time to time, but by tracking, I can see when I did well, achieved less than expected, or did far better than anticipated. Sometimes I surprise myself, and that's always exciting!
I have seen many people I've cared about over the years of my life struggle from the impact of a negative net worth. I have experienced what it feels like to have a negative net worth. Some time ago, I decided to turn that around, and oh my, did I turn it around.
I will always support knowing how to do the work before using a fancy tool. Know how to do the long division. Know how to do "the hard." Don't run from it; embrace it. In learning "the hard," you understand what it takes to march toward greatness. The more work you put into fixing or achieving something, the less likely you’ll lose it to frivolity.
To bite Denzel Washington’s words: “Ease is a greater threat to progress than hardship.”
Reversal
There's absolutely no reversal to this law. It may be more challenging to think about calculating your net worth if you're going through extreme financial difficulty. Still, understanding where you are will help you focus more sharply on where you need to go. Don't be afraid to confront where you are now versus where you hope to be. Understanding where you are is often the most crucial first step to getting where you want to go.