If you’re the sort of person who’s really into personal finance, you probably know your net worth. You might even check it every day! For the uninitiated, though, net worth can be a little bit confusing.
What exactly does it measure? How do you calculate it? And where did this concept come from?
Let’s break down what we mean by “net worth,” how to calculate it, and what it means for your financial life.
What is net worth?
The definition of net worth is the value of everything you own, minus what you owe. Essentially, it’s the difference between your assets and liabilities.
Net worth is important because it serves as a snapshot of your financial health at any given time.
Since net worth changes over time and depends on factors like inflation and interest rates, it can also be useful to track overtime in order to see how these factors affect your financial situation—and make adjustments as necessary so that you stay on track toward goals such as retirement or paying down debt.
How do you calculate it?
In order to calculate your net worth, you must add up all of your assets and then subtract all of your liabilities. The difference between the two is your net worth. The formula looks like this:
Assets – Liabilities = Net Worth
The formula can also be reversed to find out how much money you’re worth if you have a certain amount invested in assets: Assets + Liabilities = Net Worth
Why is it important to know your net worth?
Knowing your net worth is a good way to learn more about your financial health. It’s a number that can help you track how much money you’re saving and what your assets are worth.
But there’s another reason why this metric is so important—it can give you a sense of how prepared you are for life’s big events, like buying a house or starting up a family.
What is the average net worth in America?
The average net worth for Americans is $120,000.
That number may seem low, but remember that it includes all the people who have a negative net worth.
If we only looked at the people who are actually saving money and investing, then there would be more millionaires than you think!
The average net worth of people in their 50s is $1 million dollars. So if you’re in your 40s and still haven’t met this goal yet, don’t worry—you can still get there!
The good news is that most people reach this milestone before they retire (about 60% of them).
If you’re in your 50s or older and haven’t reached $1 million yet, don’t feel bad: You’re not alone! In fact, only about 30% of Americans over 50 have reached this goal so far.
But don’t worry—you still have plenty of time to catch up on retirement savings before it gets too late!
Understanding net worth is important
Understanding your net worth is important because it’s an indicator of your financial health. Your net worth is essentially the value of all of your assets minus all of your liabilities (debt).
The higher the number, the better off you’ll be in terms of financial freedom and retirement savings.
To help put some numbers to these concepts, let’s take a look at two hypothetical individuals: Bob and Jane.
They’re both 30 years old, but Bob has $100K more in his account than Jane does. Even though they’re both relatively young, this difference could mean big things for each person’s future—particularly if one intends to retire early while the other person plans on working until they drop dead at their desk.
Take the time to understand how your net worth works, and you’ll be able to use it as a measure of your financial health.
You may not be able to pay off all your debts or increase your assets today, but if you are taking steps in the right direction those numbers will reflect that.