What is Net Worth (And Why You Should Care About It)

I didn’t start tracking my net worth until I was in my late twenties. If I’m being honest, I didn’t think it was all that important. I thought my income was the metric that really mattered.

But here’s the problem with that: your income is just a snapshot of your finances. It doesn’t show the big picture.

And by not paying attention to my net worth, I was able to conveniently ignore my lingering debt and low savings rate.

But once I started tracking my net worth each month, I really saw my finances start to transform. I felt more motivated to make extra debt payments and move money into my savings account.

Not sure what net worth is why you should care about it? Stay tuned, because we’re going to cover all of that in this article.

What is Net Worth (And Why You Should Care About It)

What is net worth?

Your net worth is the difference between your assets and your liabilities. It’s one of the most important financial metrics there is. It helps to measure your overall financial picture and track your progress toward meeting your financial goals.

How do you calculate net worth?

Your net worth is the difference between what you own and what you owe. And with a little math, it’s easy to figure out on your own. Here’s how to get started.

  1. Add up all of your assets. This includes money in your bank and investment accounts. It also includes the dollar value of any assets you own such as real estate, vehicles, or valuable collectibles.
  2. Add up all of your liabilities. Your liabilities include any money you owe. This could include student loans, credit card debt, car loan, mortgage, medical debt, back taxes, and anything else you owe.
  3. Subtract your liabilities from your assets. The difference between these two numbers is your net worth. The formula looks like this:

Assets – Liabilities = Net Worth

Separate your net worth from your self worth

Thanks to student loans, most people today (nearly 70%) graduate from college with significant debt. And unfortunately, this means they’re also graduating with a negative net worth.

Adding up your net worth for the first time and finding that it’s negative can be shocking and, frankly, a punch to the gut. Trust me, I went through that feeling myself.

As you calculate your own net worth, please separate your net worth from your self-worth. Your net worth is just a number. It says nothing about you as a person or your value as a human. About one in five households have a net worth that’s either zero or negative.

You can take steps to increase your net worth, but don’t wait until you do to value your self-worth.

Read: How to Develop a Positive Money Mindset

Why is net worth important?

You might find yourself wondering why your net worth really matters. That was me for years. I thought that my income level was far more important. After all, it had more of an impact on my day-to-day life.

But your net worth is actually super important! It represents the big picture of your finances and gives you an idea of how you’re using the money you make.

Your net worth tells you whether you’re moving in the right direction

One of the benefits of tracking your net worth every month is that you can start to notice a trend. Does the number get bigger every month? Then you’re moving in the right direction by paying off debt and increasing your savings. But if the number gets smaller each month, it’s time to make some changes.

It tells you how prepared you are for the future

People often use income as the most important metric in their finances. But your income isn’t guaranteed. If you lose your job tomorrow, you’ll be stuck relying on your savings to pay the bills. And considering many Americans are living paycheck to paycheck, the amount of money they were making no longer matters when the job is gone. 

Your net worth gives you an idea of just how prepared you are to deal with a financial emergency like a job loss, as well as how prepared you’ll be for retirement.

It puts your debt into perspective

It’s easy to ignore your total debt and just focus on the monthly payment. This might feel better in the moment, but it doesn’t help you to pay it off any faster. By calculating your net worth, you’re forced to come to terms with the impact your debt has on your overall financial picture.

It may be a factor when you’re applying for a loan

When you borrow money, lenders want to know you’re going to be able to pay back what you owe. If you already have significant debts and not many assets, then a lender may see you as a bigger risk. You could end up being denied for a loan, or get approved for a loan but have a high interest rate.

How to grow your net worth

You might be a little discouraged seeing your net worth for the first time — I know I was! For those of us graduating from college with debt, it can be discouraging to start adulthood with a negative net worth. But there are plenty of ways to boost it!

  • Pay off debt. All of your debt counts as a liability in your net worth. The fewer liabilities you have, the higher your net worth is. As you pay down your debt, you’ll see your net worth increase.
  • Automate your savings. I used to struggle so much with saving. I’d tell myself that I’d save whatever I had left at the end of the month, but then there would never be anything left when that time came. The easy solution? Automation. Set up an automatic transfer from your checking account to your savings account right after payday and you never have to worry about spending that money on something else first.
  • Start investing. Investing is a great way to boost your net worth even faster than just saving. Because rather than just having your money sitting there and adding a bit to it each month, it’s growing without you having to do anything. 
  • Cut your expenses. One of the reasons people don’t see their net worth grow each month is that, even though they make good money, they spend it all each month. By reducing your expenses each month, you can start to see your net worth grow.
  • Increase your income. Cutting expenses is great and all, but you can only do it to a point. You still have bills to pay. Plus, you don’t want to cut everything you enjoy from your budget. Instead, you can increase your income to start saving more.

Read: How We’re Planning to Pay Off Six Figures of Debt

Tools to help you track your net worth

Tracking your net worth regularly is an excellent way to check in on your progress and make sure you’re moving in the wrong direction. But I’m guessing you don’t want to sit down and do the math each month! Here are a few ways you can easily track it:

  1. A net worth spreadsheet: When people join my millennial money coaching program, one of the first tools they get is a pre-made net worth spreadsheet. But even if you don’t join the program, you can make one yourself!
  2. You Need a Budget: My favorite budgeting app also happens to have a reports feature where you can track your net worth. I love watching mine change each month as I increase my savings and pay off debt!
  3. Personal Capital: This digital tool is also great for tracking your net worth. You link all of your bank, debt, and investment accounts. Then your financial dashboard reports your net worth. Plus it’s free so if you aren’t already using a budgeting app like YNAB, then Personal Capital is a great alternative.

Final Thoughts

I spent years thinking my net worth wasn’t really important. I focused solely on my income as a measure of my financial success. It wasn’t until I started tracking my net worth that I was able to look at the big picture and start seeing progress in my finances — progress that’s going to serve me in the future.