Understanding your net worth isn’t just about crunching numbers — it’s about getting a clear picture of your financial health. By calculating your net worth you will be able to make better financial decisions and set realistic financial goals. It’s like having a personal financial compass that guides you toward a secure and prosperous future.

In 2023 the Federal Reserve Board’s Survey of Consumer Finances found that the average net worth of U.S. households was approximately $1.06 million, and according to a 2024 survey by Schwab, Americans believe an average net worth of $2.5 million is required to be considered wealthy – but that’s not necessarily true. 

If those numbers seem sky-high to you then you’re not alone. Looking at the median net worth (the middle point in a list of households’ net worth) paints a different picture. The median net worth of U.S. households stood at $192,700 which is much more realistic. So how do you stack up?

By determining your net worth, you gain valuable insight into your financial standing, helping you make informed decisions about spending, saving, and investing. Let’s explore what net worth is, how to calculate it, and why knowing your net worth is essential for achieving long-term financial stability.

What Is Net Worth?

In simple terms, net worth is the difference between what you own (assets) and what you owe (liabilities). It’s a quick but simple way to assess your financial health and see if your finances are trending in a positive or negative direction. Calculating net worth regularly allows you to monitor your financial progress, adjust your goals, and make informed financial choices.

Why is it important to determine your net worth?

Determining your net worth is important because it gives you a clear snapshot of your financial health, both presently and in the future. When you know your net worth, you can better understand where you are financially and identify any areas that need attention.

In addition, when examining your net worth, you are able to see if you’re building wealth or accumulating debt. Tracking your net worth over time lets you set realistic financial goals and take actionable steps to improve your financial situation, such as paying down debt, increasing savings, or investing for the future.

How Net Worth is Calculated

To calculate net worth, use this simple formula: Net Worth = Assets – Liabilities

Let’s break down each component:

Assets: Assets include everything you own that has value, such as:

  • Cash and Savings: Money in checking and savings accounts, as well as any emergency funds.
  • Investments: Stocks, bonds, mutual funds, and retirement accounts.
  • Real Estate: The market value of your home and other properties.
  • Other Valuable Assets: Think cars, jewelry, collectibles, and other valuable possessions.

Liabilities: Liabilities are all your outstanding debts, such as:

  • Loans: Student loans, personal loans, and auto loans.
  • Mortgage: The balance you still owe on your home loan.
  • Credit Card Debt: Any outstanding credit card balances.
  • Other Debts: Any other financial obligations, such as unpaid medical bills or similar bills.

Subtracting your total liabilities from your total assets will give you your net worth.

Types of Net Worth

When people think about net worth, they often forget it can be categorized. Net worth can be either positive or negative:

Positive Net Worth: If your assets are greater than your liabilities, you have a positive net worth, which is a good indicator of financial health and stability.

Negative Net Worth: If your liabilities exceed your assets, you have a negative net worth. This situation may require a closer look at debt management or asset-building strategies to improve your financial position.

Why Knowing Your Net Worth is Important

Understanding your net worth is about so much more than just a calculation; it’s a financial tool that can help you make informed decisions and plan for your financial future. Here’s why it matters:

1. Snapshot of Financial Health

Net worth calculations will offer an accurate snapshot of your financial health at any given time. By calculating your net worth, you can quickly see if you’re on track to meet your financial goals or if any adjustments need to be made. This snapshot helps you understand where you are financially and provides a baseline for comparison as you track progress over time.

2. Benchmark for Progress

Tracking your net worth regularly allows you to benchmark your financial progress. If your net worth is increasing, it’s a positive sign – it means you’re building wealth. However, if it’s decreasing, you may need to reduce debt, increase savings, or change your spending habits. 

Over time, however, net worth benchmarking helps you stay focused on achieving financial milestones and encourages better money management.

3. Setting Financial Goals

Knowing your net worth can help you set realistic financial goals for your future. Whether your goal is saving for retirement, purchasing a home, or paying off debt, understanding your net worth gives you a clear picture of what’s feasible. When you better understand your financial situation, you can create actionable plans for reaching your goals, such as increasing contributions to a retirement fund or setting aside more savings.

4. Debt Management

Calculating net worth is also a useful tool for managing debt. By breaking down your liabilities, you can pinpoint areas where debt is holding you back financially. 

This awareness helps you prioritize debt repayment and zero in on high-interest debt to better develop strategies for paying down balances over time. In the long term, reducing debt can lead to an improved net worth and greater financial freedom.

5. Wealth Building

At the end of the day, knowing your net worth is essential for wealth-building strategies. By tracking your assets and liabilities over time, you can make informed decisions about where to allocate resources for growth. 

For example, if your net worth calculation reveals that you have excess cash or underperforming assets, you may decide to invest in stocks, real estate, or other income-generating assets. Over time, these investments can contribute to a higher net worth and a more financially independent future.

Conclusion

Determining your net worth is the first step in achieving financial health and building wealth. By understanding and tracking your net worth, you gain valuable insight into your financial position, allowing you to make informed decisions, set realistic goals, and take control of your financial future.

Your first step? Calculating your net worth and then revisiting it regularly to monitor your progress. If you need personalized advice or guidance, consider reaching out to a financial advisor like John Conte at Oliver Capital Management. With expert help, you can create a tailored financial strategy that aligns with your goals and empowers you to build wealth over time.

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