What is net worth and how to calculate it?
Editorial staff, J.P. Morgan Wealth Management
- Your net worth is the value of what you own minus what you owe.
- Assets factored into your net worth include cash, personal property, your house and your car.
- Your debts, also known as your liabilities, include credit card debt, student loans and home mortgages.
Have you ever wondered how your financial snapshot stacks up, not just in terms of what you earn, but what you really own? That’s where net worth comes into play – a single number that offers a picture into your financial health. Think of it as a financial report card, one that may help reveal whether you’re building wealth or simply treading water.
Net worth is the sum of a person’s assets minus their liabilities. Put another way, net worth is what you own minus what you owe.
Financial advisors may analyze your net worth to see how healthy your finances are, and banks may use your net worth to decide if you’re eligible for a loan. As an individual you may use your net worth to help you make a host of decisions, including deciding when to retire.
After all, understanding your net worth isn’t just for millionaires or economic experts – it's a simple yet powerful tool anyone can use to track progress, make smarter decisions and plan for the future.
What is net worth?
In simple terms, your net worth is the measure of the assets you own minus the amount you owe in debts.
For example, let’s say your assets include a home valued at $400,000, a brokerage account with $100,000 worth of stocks and $20,000 in cash. That means your total assets are worth $520,000.
But if you borrowed $20,000 from the brokerage against the value of your stocks and still owe $50,000 on your mortgage, your net worth is $450,000.
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Is your net worth how rich you are?
Net worth and “being rich” are not the same, though they’re often correlated. Net worth provides a snapshot of financial health rather than a look at day-to-day cash flow or income.
Someone may have a high income but still carry a negative net worth if their liabilities outweigh their assets.
Conversely, someone with a modest annual salary but significant assets and low debt can have a strong, positive net worth.
Feeling “rich” may be best thought of as something individuals need to assess for themselves based on their financial life and goals. Net worth, meanwhile, is a reference point to use to assess someone’s financial health based on their goals.
What is a good net worth for a person?
Determining a good net worth is subjective and should be based on your current financial status and your long- and short-term financial goals. For example, young professionals may not have a high net worth but have great long-term earning potential. Older individuals may have a higher net worth, but need to aim toward having enough assets to support retirement and unexpected expenses comfortably.
There are many factors individuals should consider when assessing their net worth like their cost of living, their dependents’ financial needs and future financial goals (like buying a house) as they assess whether they have a good net worth.
It may be helpful to track your net worth to ensure you’re moving in the right direction and growing your financial foundation to meet your long-term goals.
Can you have a negative net worth?
Yes, it is possible to have a negative net worth. This situation occurs when your liabilities (debts) exceed your assets (owned items of value).
For example, suppose someone has a significant number of student loans, credit card debt or a mortgage, but limited savings or valuables to offset those debts. This would result in a negative net worth.
While it may sound alarming, having a negative net worth is not uncommon and doesn’t mean you are in financial jeopardy. If you do have a negative net worth you may want to develop a plan to improve your net worth over time, such as reducing your debts and consistently building valuable assets (like a retirement fund).
How do I calculate my net worth
A good way to calculate your net worth is to create a spreadsheet listing your assets and your liabilities, to then use the formula to calculate your net worth. You can also use a digital tool that automatically adds up your assets and deducts your liabilities to come up with your net worth number.
Most people have a variety of assets, and some people count intangible assets – like trademarks or intellectual property – when calculating their net worth.
For the purpose of this exercise, we will look at some of the typical assets people use to calculate their net worth.
The most common assets used to calculate net worth
Start by breaking out your assets (what you own). Below is a list of common assets that play into your net worth calculation.
- Savings: Money you have in your savings and checking accounts, including high-yield savings accounts, is included in your net worth.
- Investments: Stocks, bonds, retirement savings accounts, commodities and other kinds of investments can all fluctuate in value based on market moves. As such, keep in mind that the value of your investments will only represent that moment in time when you calculate your net worth.
- Other streams of income: You can include pensions, annuities and other streams of income in the calculation of your net worth.
- Real estate: If you own your primary residence, that counts toward your net worth. Other properties, like an undeveloped plot of land or a vacation home, are also used to calculate net worth.
- Personal property: You may add some of the valuables you own including your automobile, appraised works of art, collectibles – like gold coins – or other items with an assessed value to your net worth calculation.
Keep in mind that assets can be tangible (like houses and cars) or intangible (things you can’t see, like stocks and bonds).
The most common liabilities used to calculate net worth
Now, you need to figure out your liabilities (your debts).There are a range of liabilities, or debts, that are taken into account in net worth calculations.
- Credit cards and personal loans: Personal loans are often unsecured debt, which is debt that isn’t tied to an underlying asset that can be sold to pay off the loan.
- Student loans: Education can open up earnings potential, but student loan debt can count against your net worth until it is paid off.
- Auto loans: Your car is both a useful tool to get you from place to place and an asset you can sell if you need to raise cash. Some people don’t own their cars outright, so the value of the car is the assessed value minus the value of the outstanding loan on it.
- Home equity lines of credit (HELOCs): A home equity line of credit is issued by a bank to help homeowners make improvements or use the equity in their houses for funding other kinds of purchases.
- Mortgages: Similar to car ownership, many people have a mortgage loan on their house. The value of your house that counts toward your net worth is the assessed value minus the mortgage value. Of course, the assessed value of your home is only an approximation – you don’t know the actual value of the home until you sell it.
- Bills and other obligations: In addition to the payments you may have to make on loans, other recurring bills may count against your net worth. These include utility bills, medical bills and rent (if you don’t own your home).
Subtract your liabilities from your assets to calculate your net worth
Now that you have your liabilities and assets listed out, total each up, with a separate value for liabilities and assets.
Subtract the value of the liabilities (what you owe) from the value of the assets (what you own). This resulting number is your net worth.
How to improve your net worth
Improving your net worth requires a combination of discipline, planning and strategic financial decision making. Here are steps to consider taking:
Reduce your debts
Start by tackling high-interest debts, such as credit card balances. Use strategies like the paying off your high interest debt first as a way to make progress.
Remember, every dollar you pay off reduces your liabilities and increases your net worth.
Increase your savings
Create an emergency fund with three to six months’ worth of expenses saved. Once you’ve established this safety net, continue building your savings to prepare for future opportunities or challenges.
Invest wisely
Consider investing – in assets such as stocks, bonds or exchange-traded funds (ETFs) – to grow your net worth. Consider making regular contributions to retirement accounts, like a 401(k) or IRA, which may not only help you save for the future but may also provide tax benefits. Make sure to take into consideration your risk tolerance and the time horizon you will need to meet to reach your financial goals as you make investment decisions.
Boost your income
Explore ways to earn additional income, such as freelancing or exploring higher income jobs. Every extra dollar you earn can be used to increase your savings or pay down debt, which in turn can increase your net worth.
Reassess your expenses
Conduct a thorough review of your budget to identify areas where you can cut back. Redirect those savings into building your assets, like investing or funding new opportunities.
The bottom line
There are many online calculators and downloadable worksheets that can help you calculate your net worth. You can also track the changes to your net worth with budgeting apps or your own spreadsheet.
It’s important to remember that your net worth may change regularly as your assets fluctuate in value or your debts change.
If you have questions or concerns about your net worth, speaking with an advisor may be a good place to start. The most important thing is that you stay informed of your approximate net worth at all times. Start calculating, tracking and building a brighter financial future today.
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Editorial staff, J.P. Morgan Wealth Management
