What Is Net Worth? A Beginner’s Guide to Your Financial Health

You may have seen headlines about prominent CEOs and their enormous net worths. These mind-blowing numbers aren’t just for the rich - we all have a net worth.

Your net worth is a simple equation of the total value of the assets you have, minus the debts you have. This number gives you a much better idea of where you sit financially, rather than just your annual income.

The WorkMoney team built a guide on net worth, how it works, why it’s important, and how you can use this number to gauge where you are financially.

What Net Worth Really Means 

Net worth is a measure of where you sit in your financial journey, not how well off you are. This figure helps you compare where you are against your peers in your age bracket. But most importantly, it gives a larger perspective of finances, from your monthly budget to your lifelong journey to acquiring more assets and decreasing your liabilities. 

The most important thing to remember is that your current net worth is not your prescribed situation for eternity. For example, college students likely will have a low or even negative net worth while in school. Your net worth will fluctuate throughout life, with the hope that it continues to rise over time.

Net Worth Formula (So Simple You Can Write It on a Sticky Note)

Here is the net worth calculation: Total asset value - total liabilities/debts = Net worth

The equation is simple, but finding the value of your total assets and liabilities will be a bit more work.

What Counts as an Asset? (Clear Examples Anyone Can Use)

First, track down all your assets and determine their current cash value for each. They can include:

• Checking and savings accounts

• Cash

• Retirement accounts (401(k), IRA)

• Estimated home value

• Brokerage investment account

• Car value

• Valuable items: electronics, tools, jewelry

• Cryptocurrency

What Counts as a Liability?

Next, consider your outstanding loans for the second number. These could include:

• Student loans

• Credit card balances

• Car loans

• Personal loans

• Medical debt

• Mortgage balance

• Buy-now-pay-later balances

Once you have both of these numbers, you will subtract liabilities from your assets, giving you your net worth. This number can feel obscure, making you wonder if it's a “good” or “bad” number.

The Federal Reserve released its Survey of Consumer Finances in October 2023, and detailed both the median and average net worth of American households.

Again, if your number is lower than the average, that doesn’t mean you’re a failure. It means there are areas you can likely improve in. This could be eliminating high-interest debt, moving jobs for higher pay or cutting back on discretionary spending, to name a few.

Income vs. Net Worth: The Bathtub Analogy

Your income and your net worth are both important figures in your financial life. However, you can have a high income and low net worth, and vice versa. Here’s how you can think of both number in the analogy of a bathtub.

The water flowing into the bathtub is your income. The goal is to have as much water flowing into the bathtub. However, your spending is the water flowing out through the drain. No matter how much water you have coming in, that flowing out will continue. 

The magic is flowing as much water as possible (income) and minimize what goes in the drain (spending). Once you do that, the water level will go up (net worth).

The takeaway is simple: no matter how much water you have coming into your bathtub, the drain will always win. Even with a modest water flow (income), you can fill your bathtub plenty with a minimal drain.

Is My Net Worth Good?

The name of the game is to grow your net worth as large as possible. This simply means you have more assets under your belt, giving you more control over your time and life.

Here’s a more detailed look at where you fall on the net worth scale based on your age.

*Above data is from 2023, so adjusting for some variance is needed.

Actionable Ways to Improve It Right Now

If you’re looking to grow your net worth, here are six actionable steps to take today:

1. Automate your savings first: Set up automatic transfers to savings and investment accounts on payday before you have a chance to spend the money. Even starting with 10-15% of your income can compound significantly over time.
   NOTE: If you’re ready to begin your investment journey, Stackwell can help you get started. 
   

2. Maximize employer retirement matches: If your employer offers a 401(k) match, contribute at least enough to get the full match. This is essentially free money that immediately boosts your net worth.
   

3. Eliminate high-interest debt aggressively: Focus on paying off credit cards and personal loans with interest rates above 10%. The interest you save is a guaranteed return on your money.
   NOTE: If you have high interest student loan payments bogging down your net worth journey, consider using Savi to see where you can possibly save, or even have them forgiven.
   

4. Increase your income through skill development: Invest time in learning high-demand skills, earning certifications, or developing expertise that commands higher pay in your field. Negotiate raises or consider changing jobs.
   

5. Live below your means, not at your means: As your income grows, resist lifestyle inflation. Keep housing costs under 30% of your income and avoid financing depreciating assets like cars with long-term loans.
   

6. Track your net worth monthly: Calculate assets minus liabilities every month. This awareness helps you make better financial decisions and stay motivated as you watch the number grow.
   

Your Net Worth Is a Starting Point, Not a Scorecard

No matter your current net worth number, it’s something you have the ability to change starting today. It shouldn’t be your sole focus in life, but the more you can grow your net worth, the more freedom you will have to do what makes you happy.