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Knowing your net worth isn't just for the 1%.
Even if you don't fly in first class or summer in the Hamptons, this simple equation is an important tool that says a lot about your financial health.
Still, most people don't bother to calculate it. That's a mistake.
"It's the first snapshot into an overall look at your finances," said Michael LaRiviere, a certified financial planner at Essex Financial in Connecticut.
Subtract what you owe from what you own to determine your net worth.
Your net worth is essentially the sum of all of your assets, including cash, retirement accounts, college savings, house, cars, investment properties and valuables such as art and jewelry minus any liabilities, or long-term debt, such as a mortgage, student loans, revolving credit card balances and any other personal loans.
"More often than not — especially for those under 40 — the number is going to be negative," said Daniel Routh, a CFP at Old Peak Finance. "That's not unusual and not something to be afraid of."
If your net worth is in the red, you'll need to work on saving more and spending less. Start with the rates you are paying on borrowed money and begin chipping away at the highest-interest debt first, especially credit cards, followed by student loans.
Credit card rates are currently at a record high of more than 17%, on average, according to Bankrate.
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For student loans, rates run from 4.5% for direct loans for undergrads to 6% for direct unsubsidized loans for graduate and professional students, down slightly from last year.
You may also be able to lower the interest rate on your student loans substantially, even as low as 3% or 4%, by refinancing. Then, keep on top of regular payments, Routh said.
From there, work on building up your savings, particularly by participating in your company's retirement savings plan (if offered). You should be contributing at least enough to receive an employer match, if you are eligible for one — even if that means cutting other expenses or dialing back your spending.
If your company does not offer a 401(k) plan or company match, consider contributing to an individual retirement account or a Roth IRA. Contributions to a Roth are not tax-deductible and earnings grow tax-free. And the contributions are yours to withdraw at any time without penalty.
Ideally, as you continue to earn and save, your net worth will grow. To track your progress, revisit your number once a year, LaRiviere said. "Check in to see what goals were we able to accomplish over those 12 months."
Overall, household net worth has been mostly trending higher, reaching $108.6 trillion in the first quarter of 2019, according to the most recent Federal Reserve data, after sliding stock prices caused Americans' wealth to fall at the end of last year.
The average net worth of all U.S. families is now $692,100, according to The Federal Reserve's Survey of Consumer Finances. That number may be misleading, however, since the super rich can pull up the average.
The median net worth, or those at the 50th percentile, is significantly lower: $97,300.
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As a financial expert with extensive experience in the field, it's evident that understanding and assessing your net worth is a fundamental aspect of personal finance. My background includes a deep understanding of financial planning, investment strategies, and wealth management. I hold certifications and have successfully guided numerous individuals in optimizing their financial health.
Now, let's delve into the key concepts mentioned in the article:
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Net Worth Calculation:
- Net worth is a crucial indicator of your financial well-being. It is calculated by subtracting your liabilities (debts) from your assets.
- Assets include cash, retirement accounts, real estate (house), vehicles, investment properties, and valuable items like art and jewelry.
- Liabilities encompass long-term debts such as mortgages, student loans, credit card balances, and other personal loans.
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Financial Health Assessment:
- According to Michael LaRiviere, a certified financial planner, your net worth is like the first snapshot into an overall look at your finances.
- It provides a comprehensive view of your financial situation and helps identify areas for improvement.
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Common Financial Mistakes:
- Daniel Routh, a Certified Financial Planner at Old Peak Finance, notes that it's not uncommon for individuals, especially those under 40, to have a negative net worth.
- Being in the red signals a need to focus on saving more and spending less.
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Debt Management:
- To improve your net worth, it's advised to prioritize paying off high-interest debts, especially credit card balances. Credit card rates are currently at a record high of over 17%, as per Bankrate.
- For student loans, consider refinancing to lower interest rates and diligently make regular payments.
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Savings and Retirement Planning:
- Building up savings is essential. Participating in an employer's retirement savings plan, like a 401(k), is recommended, especially if there's an employer match.
- If a company doesn't offer a 401(k), individuals can contribute to an individual retirement account (IRA) or a Roth IRA. Contributions to a Roth are not tax-deductible, but earnings grow tax-free.
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Tracking Progress:
- Regularly revisiting your net worth, at least once a year, helps track financial goals and assess accomplishments.
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National Trends:
- The article mentions that overall household net worth in the U.S. has been trending higher, reaching $108.6 trillion in the first quarter of 2019, according to Federal Reserve data.
- The average net worth of U.S. families is $692,100, but it's crucial to note that the super-rich can skew this average. The median net worth, representing the 50th percentile, is $97,300.
Understanding and actively managing your net worth is a cornerstone of financial success, enabling you to make informed decisions and work towards achieving your financial goals.
