In personal finance, it can be easy to miss the forest for the trees. We’ve all been there – you get focused on one particular account balance or debt threshold or deadline as a measure of your financial health. And it’s completely normal to do that! But when I talk with my clients these days, I like to start with net worth.
I love net worth because it keeps your eye on the bigger prize. It’s your big picture. You may be reluctant to let go of cash money to pay off debts because it feels like “losing” money. But when you are focused on net worth, taking the positive and applying it to the negative isn’t a loss — just a transfer. A transfer that’s ultimately really, really good for your financial health, because it plugs a leak in your net worth (the leak = outgoing interest you were paying on that debt. Interest should be something you earn, not something you pay!).
If you’ve never calculated your net worth, you may have a little legwork to do: you need to find every financial account you have (and your spouse’s, if you’re married). One way to do this is with a budgeting tool like Mint, which we use. Once we added all our accounts, Mint automatically updates virtually everything on an ongoing basis, from account balances to house Zestimates. But if you want to calculate your net worth manually, there are three major categories that go into it.
The major account types you’re looking for here are going to be deposit, investment, and debt. There are also some unusual cases here and there like cryptocurrency or trust funds. If it’s in your name and has a clear cash value, just add it to the list.
Deposit accounts include checking, savings, and money market accounts – it’s money you have, that you can withdraw without penalty or “selling” anything.
Investment accounts include both retirement and non-retirement investment accounts. There are special rules governing withdrawals from these account types, particularly accounts that are tax-favored like retirement and kids’ college funds (e.g., 401(k), 403(b), TSP, Roth IRA, traditional IRA, rollover IRA, SIMPLE IRA, inherited IRAs, 529 plans, and ESAs). Even if you just contributed a tiny bit to some retirement plan ten years ago at another employer, let’s find that money.
Piles of cash that you have stuffed under your bed or sacks of gold that are buried under various trees, Ron Swanson-style, also count. (Please note, this is not a Fortuna-approved investment strategy.)
Now, run down any debts you may have. If you haven’t pulled your credit report recently, you can go to annualcreditreport.com and run one of your free credit reports. (As of February 2022, the credit bureaus continue to offer free weekly credit reports to help people stay on top of things during the pandemic.)
We want all the places you might owe money: mortgages or lines of credit on primary residences and investment properties, vehicle loans, student loans, medical debt, credit cards (including store credit cards), unsecured/personal loans, accounts in collections, evictions… if your credit report says you owe it, we want to account for it. This also includes any debts for which you are a co-signer, even if the other party on the debt has agreed to make the payments. (Those agreements are common, but you’re still legally liable for the debt.)
If you have any semi-formal debts to family/friends/organized crime syndicates/cartoon babies that don’t appear on your credit report, put them on the list too.
- If you think any items on your credit report are inaccurate, make a note of it. It’s pretty easy to initiate a dispute process, but you’ll want to make sure you have the ammo you need. Let me know if you need help with that.
In this case, we’re talking specifically about all assets that you can readily find the value of and for which there is a fairly reliable secondary market. Ideally, these items will be likely to hold their value decently well, and that you would or could sell if you needed to scare up some cash. This includes vehicles of all types (cars, boats, motorcycles, tractors…) and real estate. It also includes valuable items that are worth more than $500 or so in cash: a piece of expensive but unsentimental jewelry, a rare book collection, collector-quality original art, high-value home entertainment equipment, musical instruments, or a group of items that aggregate to a decently high value. (For instance, if you inherited $5k worth of guns from a beloved family member and you don’t think you want to keep all of them, that counts.) And it definitely includes any real estate that you may own!
This is going to leave stuff out, of course — if you sold everything you owned, you’d know exactly what it was all worth, but you probably don’t want to do that! Especially because average household goods values are consistently much lower than people think. Resale value is much lower than replacement value, which is what you’re listing for insurance purposes.
So let’s only include big stuff that you could part with if you had to, and that holds its value on an accessible secondary market. Most things won’t be worth exactly what you paid for them; a lot of stuff depreciates, but some stuff appreciates.
- I’ll note that there’s a fine line in some cases between true assets and “valuable personal property,” which most insurers consider to be items that you own that are valued at $100 or more. Sentimental valuable jewelry goes in this category. I haven’t personally included my engagement ring in my net worth calculation, because I am not considering selling it. But if you’re divorced and plan to rustle up some cash to get yourself settled again… feel free to put a ring on it.
Now, we add our monetary assets to the value of our non-monetary assets, and subtract the total of our debts. And… that’s it. Now you know your net worth!
You might find that you have a lot of assets, but also a great deal of debt attached to those assets, and that plus your unsecured debts = negative net worth.
You might also find that your home value increased a lot more than you thought, your debts went down, and now your net worth is seven figures. In that case, congratulations! You’re a millionaire! (Yes, we absolutely count net worth millionaires here at Fortuna.)
Although I’ve seen calculators online showing what your net worth “should” be at a given age, I don’t like their premises: your target net worth at your age shouldn’t be based on where someone else thinks you ought to be. It should be based on where you want to be, and when you want to get there. One 35-year-old could have a net worth of $2 million, but if they want to retire at 40 and live a high-cost post-retirement life, their target net worth will look very different from another 35-year-old who has a net worth of $50k, is planning to work til 65, and anticipates a relatively low-cost retirement. (I’m workshopping my own calculator, so stay tuned!)
All of this is to say… don’t let the “shoulds” get you down. Your net worth is a great number to know, but it’s just where you are right now. By beginning to think about your financial health in terms of your net worth, you’re starting a powerful money mindset shift. If you’d like some help with that, please reach out for a Big Financial Picture session!