The One Financial Number You Shouldn’t Ignore: Your Net Worth

When managing personal finances, most people focus on income, expenses, and credit scores. But one financial metric is often overlooked: net worth.

Whether you’re just starting or have been building wealth for decades, understanding your net worth can offer key insights into your financial health. Since it gives a clear picture of what you’re doing right, what you’re doing wrong, and the changes you need to make to achieve your financial goals, it is an additional metric you can consult as you’re on your wealth-building journey.

What Is Net Worth?

Net worth is essentially the difference between what you own and what owe. To calculate it, you simply subtract your debts, or liabilities (what you owe), from your assets (what you own).

Assets – Debts = Net Worth

Assets might include your home, vehicles, bank accounts, investments, and retirement funds. Debts include such items as your mortgage, student loans, car loans, and credit cards.

Analyzing Your Net Worth

Consider your net worth an indicator of your financial habits, decision making, and overall money management. Ultimately, understanding what this number says about you can help you analyze your finances and identify areas for improvement.

“Net worth is a reflection of the financial decisions that you have made. You can see if you are investing if your assets are growing, or if your net worth is declining because you’re spending too much,” said Alissa Todd, personal chief financial officer, and wealth advisor at The Wealth Consulting Group.

If your net worth is negative, it means you owe more than you own, while a positive net worth shows that your assets exceed your liabilities.

For example, if your assets total $150,000 and your debts total $75,000, your net worth is $75,000. But if your debts total $175,000, your net worth would be -$25,000.

A positive net worth is generally a good thing and a negative net worth may indicate you have some things to work on. But, like a low credit score, a negative net worth doesn’t necessarily mean financial irresponsibility, and you don’t have to view it as such. It simply means you have more liabilities than assets at the moment and need to take a closer look at how you manage your finances.

“Don’t beat yourself up if you have a negative net worth. It doesn’t mean that you’ve made poor financial decisions or that you’re necessarily in a bad financial spot,” Todd said.

But tracking your net worth over time can give you a clear picture of whether you’re moving closer to your goals or not. If you have no idea how to start tracking that, start by determining your ideal, or target, net worth. Here’s a formula to help as a starting point. Keep in mind your ideal amount may vary:

Target Net Worth = [Your Age − 25] ∗ [1/5th ​∗ Gross Annual Income]

How to Increase Your Net Worth

Viewing your net worth as a snapshot of your current financial position can help you develop a plan to improve it and build long-term financial stability.

Here are a few steps you can take to improve your financial standing.

Pay Down Debt

An Experian study revealed that the average consumer’s debt is $105,056, which encompasses a mix of debts, including student loans, auto loans, credit cards, and mortgages. However, not all debt is created equal, and some might be part of a healthy financial strategy.

“It can seem like all debts are negative because they reduce your net worth, but debts like student loans and mortgages aren’t really bad debts to have,” Todd said.

You want to pay off all of your debt, prioritizing high-interest debts like credit cards. Also, avoid taking on additional debt, which can decrease your net worth.

“Have a good understanding of your liabilities. It doesn’t mean that you need to go and pay off your low-interest-rate debt like your mortgage or student loans. It’s more about high-interest-rate debt and managing that and paying those kinds of debts off,” Todd said.

Save and Invest

Consistently saving a portion of your income and investing it wisely in things like stocks, real estate, or retirement accounts can significantly increase your assets over time. Many Americans believe to retire comfortably, they need $1.46 million. However, this depends on several factors, including lifestyle and expenses. Regardless of what you think you need for retirement, you have to be strategic to achieve that goal.

“Negotiate for higher pay raises and increase your income. If you’re making more money, you contribute more to your 401(k), and your employer match dollar-wise is higher when you earn more,” Todd said.

Track Your Progress

It’s important to know where you stand when it comes to your net worth, especially if you want to see any changes or progress, and a review of your net worth at least once or twice per year is a great place to start.

“Focus on the trend of your net worth. Are you noticing over time that your assets are increasing and your debts decreasing? That means you’re headed in the right direction,” Todd told Investopedia. “If you see other trends like your assets are declining and your liabilities are increasing, then that’s the signal to dive a little deeper to see what’s going on in your overall finances.”

After you review your net worth, if necessary, you can adjust your plan accordingly to stay on track.

“It takes time to see an actual change in net worth. The important thing is to understand the why behind the change,” Todd said. “Do I need to investigate this further? Do I need to change any of my financial habits so that we can correct any financial behaviors? Or does it show what you’re doing well and you’re on track?”

The Bottom Line

Net worth is an important financial metric everyone should pay attention to. Whether the goal is homeownership, early retirement, or financial independence, knowing your net worth gives you insight into your situation. When you use your net worth to measure your progress, you can ensure you are consistently building wealth and securing long-term financial stability.

“Net worth is such a personal journey. It’s really just a comparison of yourself to your past self. Don’t compare your net worth to your neighbor, to your friend,” Todd said.