What Is Net Worth And How Is It Calculated?

Thinking about net worth may seem like something only wealthy people do, but it’s a number everyone should know. Tracking your net worth is a great way to monitor your financial progress and ensure you’re on track to reach your goals. Let’s look at what net worth is and how you can build net worth over time. 

What Is Net Worth?

Net worth is the sum of your assets minus any liabilities, and it’s one metric you can use to evaluate your financial situation. If you have more assets than liabilities, you have a positive net worth. But if your liabilities exceed your assets, you have a negative net worth.

Many people see their income as a measure of their financial success, but your net worth matters more. You can have a high income and a low net worth if your spending is high, or you have a lot of debt. Alternatively, you could have a lower income and high net worth if you live within your means, avoid debt, and save aggressively.

What Does Net Worth Include?

Net worth is your personal or business assets (such as retirement accounts or office equipment) minus your liabilities (such as a student or business loan). It’s the difference between what you owe and what you own. Let’s look at how assets and liabilities work.

Liabilities

Liabilities refer to money you owe another person or organization. Here are some examples of liabilities:

• Mortgages
• Car loans
• Student loans
• Personal loans
• Credit card debt
• Unpaid taxes

Assets

“Assets” typically means liquid money, like cash or investments you can sell for cash. It can include certain illiquid assets if you’re able or willing to sell them for cash. Here are some common examples of assets:

• Checking accounts
• Savings accounts
• Physical cash
• Home equity
• Vehicle value
• Valuable jewelry
• Art and collectibles
• Stocks
• Bonds
• Real estate investments
• 401(k)
• IRA

How To Calculate Net Worth

Net worth can be used to evaluate the financial health of an individual or business—let’s look at an example of each. 

An Example Of Net Worth In Business

A business’s net worth — also known as shareholder’s equity — matters for a few different reasons. A positive net worth indicates the company is more financially stable and can help the business acquire capital and attract investors. And if you hope to sell your business one day, potential buyers will look at the net worth to determine the market value.

To calculate net worth, you’ll start by listing the business’s assets:

• Cash: $50,000
• Accounts receivable: $25,000
• Property: $100,000
• Equipment: $20,000
• Total assets: $195,000

Next, you’ll list out your business’s liabilities:

• Accounts payable: $15,000
• Long-term loan: $40,000
• Mortgage: $80,000
• Total liabilities: $135,000

When you subtract the company’s liabilities from its assets, you end up with a positive net worth of $60,000.

An Example Of Net Worth In Personal Finance

High-net-worth individuals manage their finances through investments and wealth managers. They’ll typically spread their investments across a variety of asset classes, like stocks, bonds, cash, and real estate. Diversifying your assets is the best way to mitigate risk and protect your investments.

To calculate your personal net worth, you’ll start by listing out all your assets:

• Checking: $2,500
• Savings: $10,000
• 401(k): $55,000
• Stocks and bonds: $25,000
• Home: $300,000
• Total assets: $392,500

Next, you’ll add up your total liabilities:

• Credit cards: $7,000
• Student loans: $50,000
• Car loan: $10,000
• Mortgage: $100,000
• Total liabilities: $167,000

When you subtract your liabilities from your assets, you end up with a positive net worth of $225,500.

How To Build Net Worth

Increasing your net worth gives you more financial security and options later in life. And building net worth doesn’t have to be confusing — here are four steps you can take to get started.

1. Create And Stick To A Budget

A budget is a plan for how you’ll spend your money each month, and creating and sticking to a budget is the foundation of any good financial plan. It enables you to manage your money responsibly, avoid debt, and prioritize saving and investing.

To calculate a budget, you’ll start by estimating your monthly income. From there, you’ll add up all your fixed expenses, like your mortgage payment, utilities and loan payments. You’ll also think about variable costs like food and gas.

There may be a bit of a learning curve at first, but budgeting will get easier if you stick with it. If you’re having trouble coming up with a budget, tools like Rocket Money^SM can help.

2. Ensure You Have An Emergency Fund

An emergency fund is a cash reserve specifically for unplanned expenses or financial emergencies. For example, if your car breaks down or you lose your job, you can take money from your emergency fund. This tool helps you avoid relying on high-interest credit cards or pulling from your investment accounts.

Ideally, you’ll have at least 6 months’ worth of expenses in your emergency fund. If you have to draw from your emergency fund, make sure to replenish it as soon as possible.

3. Invest Heavily In Your Retirement

Too many people put off saving for their retirement and miss out on the benefits of compound interest. The sooner you begin saving for retirement, the longer your money has to grow. You should aim to save at least 15% of your annual income for retirement.

Start by taking advantage of your employer-sponsored 401(k) plan, especially if your employer will match your contributions. A 401(k) allows you to contribute pretax dollars toward your eventual retirement. If your employer doesn’t offer a 401(k), you can open an Individual Retirement Account (IRA) and manage it yourself. 

4. Make Smart Investments

If you have additional money to invest, you can put these funds in stocks or real estate to grow your wealth. These are considered long-term investments — accounts you plan to hold for more than a year that can generate additional income.

However, there’s more nuance involved in long-term investing. Before you start investing, it's a good idea to speak to a financial planner or brokerage professional. That way, you can ensure you’re building a safe and well-diversified portfolio.

Net Worth FAQs

Let’s look at some frequently asked questions about net worth.

Does my net worth include my 401(k)?

Yes, any money you contribute to your 401(k) is an asset and is included in your net worth. When you start saving money in your 401(k), it will account for a small percentage of your net worth. But as the balance continues to grow, it will account for more of your net worth.

How do I find out my net worth?

To find out your net worth, you’ll start by adding up any assets like any cash, savings, retirement accounts or home equity. Then you’ll add up all the money you owe, like your mortgage, credit cards or student loan debt. From there, you’ll subtract your liabilities from your assets to learn your net worth.

What’s the top 5% of net worth?

If you have a net worth of $3,795,000, you’re in the top 5% of U.S. households.

What’s a good net worth?

Everyone has a different lifestyle and expectations, so what’s considered a good net worth will depend on the individual. However, there are different formulas you can use to determine what your net worth should be. For example, one formula recommends that your net worth at age 72 should be 20 times your annual spending.

How much should I have saved?

Ideally, you should have at least three to six months’ worth of expenses saved in an emergency fund. When it comes to saving for retirement, aim to save at least three times your annual salary by age 40.

The Bottom Line

Your net worth is the sum of your assets minus any liabilities. You can achieve a higher net worth by reducing your spending, saving aggressively for retirement, and making wise investments. Online tools can help with this, so be sure to download the Rocket Money app to monitor and build your net worth.