Net worth is one way to measure your overall financial well-being. Here's some important info to know about net worth—from how to calculate it to how to grow it—plus why knowing yours can be helpful.
What is net worth?
Net worth is the sum of your assets (such as your cash savings, investments, and value of your home) minus the sum of your debts. In other words, it's what you own minus what you owe.
As a snapshot of your overall financial situation, income isn't the most important factor in net worth. Rather, it's what you do with your income that matters. For example, someone with a lower income could have a higher net worth than a much higher earner, provided they had more savings and/or less debt.
Because it provides a window into someone's saving and spending habits, net worth can be a signal to financial professionals how financially stable you are and may be used to determine whether you qualify for things like a mortgage. It may also give you a sense of how prepared you are for important financial milestones, like retirement.
How to calculate net worth
The net worth formula is: Assets – Liabilities = Net worth. Soto calculate your net worth, add up the value of everything you own and subtract from it the value of everything you owe (aka your liabilities).
Assets are anything you own that has financial value, like money in your bank accounts, investment accounts, and retirement plans; the value of your home and other real estate; the resale value of your car and valuable property like jewelry and furniture; and the market value of your small business. Basically, it's cash and anything else that could be sold for cash. Liabilities are your outstanding debts. This includes your credit card balances, mortgage, auto loans, student loans, and any other money you need to repay to others.
Sometimes an item can be both an asset and a liability. For example, the value of your home can be counted as an asset. But if you are still paying off a mortgage, you have a liability too. You'll need to subtract what you owe on your home from its market value to determine how it impacts your net worth.
After completing the calculation, notice the number. If it's negative, you're said to have a negative net worth. If the number is positive, you have a positive net worth. If your liabilities perfectly cancel out your assets, your net worth is 0. For those paying off large student loans or mortgages, having a net worth of 0 can be a cause for celebration, as it means they are making progress toward having a positive net worth.
How to increase net worth
Consider these strategies to help increase the value of your assets while chipping away at your liabilities:
Audit your financial life
Sit down with your paystubs and bills from the last few months to understand where your money has been going. This may reveal easy areas to trim, like unused gym memberships or subscription payments you forgot about but are still paying for.
This is also a good time to review your overall budget. If you haven't found a budgeting framework that works for you, you might consider the 50/15/5 budget, which has 50% of your income going to necessities, 15% to retirement savings that also includes your employer match, and 5% to building an emergency fund and other short-term savings goals. You're then free to allocate your remaining cash to nonessentials and other priorities, which could include saving and investing goals.
Build and keep up an emergency fund
Emergency funds help protect you in the event of, yep, an emergency. By having money set aside for life's inevitable surprises, you could help cushion yourself from taking on high-interest debt in a financial emergency, such as when your car breaks down, you lose your job, or you're faced with medical bills. If you don't already have money set aside for an emergency, prioritize saving up at least $1,000 as soon as you can. Then Fidelity suggests working towards saving at least 3 to 6 months' worth of essential expenses.
Pay down and avoid unnecessary debt
Debt hurts your net worth in 2 ways. First, it counts as a liability, meaning it cancels out some or all of the positive assets you have. Second, you're funneling some of your income toward paying back what you owe, so you have less to direct toward net-worth-building goals. By making progress toward zeroing out your debts, you're working to free up extra monthly income and improve your overall net worth.
By the same token, you'll want to avoid taking on any new debt you don't need to keep it from lowering your net worth.
Boost your income
To save more, consider how you may be able to raise your income each month. If it's been a while since your last raise at work, it may be time to negotiate for more. You might also consider pursuing a side gig or thinking through passive income opportunities.
Invest your savings
Saving money alone may not be enough to raise your net worth. By investing money, you position it to potentially benefit from compound interest. That's when your investment returns earn returns of their own, which could help your money grow over time.
Not sure where to get started? Check out our guide on how to invest. And remember: Investing is generally for long-term financial goals, such as retirement. It could be smart to keep some cash in a more accessible place, such as a savings account, for short-term goals and in case of emergency.
Track your net worth over time
To ensure you're making progress toward boosting your net worth, check in on your status from time to time. Seeing your net worth grow—or even shrink—could motivate you to figure out ways to save more.
