Your net worth is a good indicator of your overall financial health — a snapshot that shows you where you are on your financial journey at this moment.
In brief, your net worth is the sum of all your assets minus any liabilities. Those assets can include bank accounts, CDs, investments, and retirement accounts, as well as the cash value of your home, car or other valuables you own.
Liabilities include credit card bills, student loans, car loans and the outstanding balance on your mortgage.
Net worth = assets - liabilities
Why your net worth is important
Tracking your net worth over time is a helpful indicator of your financial stability. People work hard to bring home their salaries, but what happens after a paychecks hit their bank account is not always predictable.
Looking at net worth can help you understand where your money has gone in the past vs. where you want it to go in the future.
When you're trying to decide your next financial move — whether that's buying a car or a house, taking out debt to go back to school or hitting a new savings target — knowing your net worth can help you see the big picture. But it won't necessarily help you, say, stick to a daily budget.
Let's imagine a few examples where knowing your net worth can be helpful.
Scenario One: You're a new graduate with $1,000 in your savings, $10,000 in student loan debt and a part-time job that pays just enough to cover your monthly bills. You're looking for a full-time gig so you can get on your feet. Your student loan has an APR of 4.65%.
- Your assets: $1,000 cash savings
- Your liabilities: $10,000 student loans
- Your net worth: -$9,000
By seeing that your total net worth is actually negative, your priorities are pretty clear. You're probably most focused on getting a job that allows you to save a nest egg while paying off your student loans.
However, since federal student loans charge relatively lower APR (and are currently at 0% through September thanks to the federal government's covid-relief measures), it's also possible your debt doesn't feel urgent, and that's OK. You can use this time to continue growing your emergency fund.
It's not unusual for 20-somethings to have negative net worth as they are building careers and growing their assets. As you earn a higher salary, are able to pay off more debt and invest in retirement funds like a company-sponsored 401(k), you'll see that number increase.
Scenario Two: You are a homeowner. Your home is worth $350,000 in the current market. You have $250,000 left to pay on your mortgage, and you have a credit card balance of $10,000. Your mortgage has an APR of 3.25% and your credit card charges 19.99%. You want to sell your house, but your realtor says it needs $5,000 in repairs to get the best offer. You have $10,000 in cash savings and $30,000 in a 401(k). Your income is enough to pay all your bills, and you have $500 in discretionary cash left over each month.
- Your assets: $10,000 cash savings; home valued at $350,000; $30,000 in retirement investments
- Your liabilities: $10,000 credit card balance; $250,000 mortgage
- Your net worth: $130,000
The above net worth calculation is not as straightforward as the first. There are many factors at play, including the house's value and whether an owner can sell it for what it's worth. Housing valuations change all the time. Likewise, the balance of your 401(k) can fluctuate overnight based on the stock market.
The above homeowner has some choices to face: If they want to grow their net worth, should they invest $5,000 in renovations if their realtor says it will make their house $15,000 more valuable? Or should they pay down their credit card with 19.99% interest first?
Since the interest on their credit card is so high, it may be wise to knock that out using a portion of their $10,000 savings, especially since they could use their $500 in disposable income every month to rebuild their savings.
But then again, an unexpected job loss might require them to dip into their emergency fund, proving how most financial decisions involve calculated risks. In this situation, the homeowner might consider hiring a financial advisor on a fee basis to get some expert advice.
Having a high credit score qualifies you for the best interest rates, helping you borrow money more affordably without cutting into your net worth too much. Credit monitoring services like CreditWise® from Capital One and IdentityForce® help you monitor your credit score so there are no surprises.
Check out our list of best credit-building cards to repair or improve your score.
How to track net worth over time
Net worth fluctuates, and that's normal. Platforms such as Empower and Mint make it easy to track your net worth by giving you the option to link all of your accounts, including checking, savings, money markets, CDs and retirement accounts.
You can also link to and view your liabilities, making it easier to stay motivated and on track as you pay off debt.
The goal, whether you're in the red or the black, is to be honest and know where you stand along the way.
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