What Is Net Worth?

What Is Net Worth?

Net worth is the difference between your total assets and total liabilities. One way to think about net worth: It's what would be left over if you cashed out all your assets and paid off your debts. You're not likely to actually do this, but understanding the relationship between what you owe and what you own can tell you whether you're overextended on debt—or heading in that direction.

What Are Your Assets?

For the purposes of estimating your net worth, put cash and any assets that can be converted to cash in the positive column. Assets may include the following:

• Checking and savings account balances
• Retirement funds
• Investments
• Your home value or equity and other real estate
• Your car (if you own or are financing it)
• Cash value of life insurance policies
• Valuables such as jewelry, art or collectibles

What Are Your Liabilities?

Any outstanding debts add to your liabilities.

• Home loans
• Car loans
• Credit card debt
• Student loans
• Personal loans
• Other loans or credit

Net Worth vs. Income

Both net worth and income can be indicators of financial health, but they measure different things. Net worth shows the difference between your assets and liabilities. Income is what you make from wages, investments, business income, passive income and benefits like Social Security or pensions.

Your income doesn't factor directly into calculating your net worth, but it can have an effect. If your income is low or it's disrupted due to a job loss, you may incur debt or spend your savings to make ends meet. Increased debt and decreased assets lower your net worth. On the other hand, higher income can mean more opportunity to save and invest, or to pay down debt, both of which may improve your net worth.

How to Calculate Your Net Worth

To calculate your net worth, add up your assets and subtract your liabilities. You can start with a blank sheet of paper, plug your information into an online net worth calculator or open a spreadsheet and start running the numbers. Here are the basic steps you'll follow:

1. Add Up Your Assets

Make a list of your assets, including bank account balances, retirement savings and investments. You can estimate the current market value of your home using websites like Zillow or Trulia. Use a car valuation site like Edmunds or Kelley Blue Book to estimate your vehicle's value.

2. List Your Liabilities

Itemize your current debts, including your mortgage, car loan, credit card balances, student loans and personal loans.

3. Subtract Liabilities From Assets

Subtract your total liabilities from your total assets to get your net worth. If your assets outweigh liabilities, you have a positive net worth: You own more than you owe. On the other hand, if you have more debts than assets, your net worth is negative. A negative net worth suggests you don't have enough financial cushion to cover your debts in the event of an emergency.

How Net Worth Impacts Credit

Net worth has no direct impact on your credit score. The factors that go into calculating your credit score are those listed on your credit report. That includes payment history, amounts owed, credit history, credit mix and new credit. Your income and net worth are not included on your credit report and credit scoring models do not use them as a factor in your credit scores.

Your net worth can, however, affect your access to credit. A lender may calculate your net worth as part of the home loan approval process. You may be asked to list your assets, which the lender may compare against your outstanding debt to better understand your ability to repay a loan.

On a personal level, tracking your net worth may offer insight into your relationship with credit. If an increase in liabilities causes your net worth to sink, you may want to evaluate your credit use to make sure you aren't overutilizing credit—especially if your net worth continues to decline over time.

What Should Your Net Worth Be?

There's no magic number that represents the right net worth for you. Generally speaking, a positive net worth is better than a negative one, and a higher net worth beats a lower one. For most people, net worth builds over time. Keep these considerations in mind as you calculate and track your net worth:

• It's OK to start slow. You may start out with a low or negative net worth, especially if you completed your education with student loan debt. It's normal to begin at square one—and to take time to lay a financial foundation.
• Focus on progress. Try to build your net worth by contributing toward retirement, saving money and minimizing debt. Inevitably, your net worth will fluctuate. Changes in the housing and stock markets, for example, can raise or lower the value of your assets—and affect your net worth for better or worse. You may take on short-term debt to cover an emergency expense or start a business. The important thing is to see progress over the long term.

What Is the Average Net Worth by Age?

Although your financial goals are unique to you, you may wonder how your net worth compares to others' in your age group. The Federal Reserve tracks average net worth by age as part of its Survey of Consumer Finances (SCF). Between 2019 and 2022, median net worth for all age groups increased by 37%, from $141,100 to $192,900. Overall, net worth tends to rise with age as savings accumulate and assets appreciate in value. The following table shows median and mean family net worth in 2022.

Source: Federal Reserve, 2023 Survey of Consumer Finances

How to Increase Your Net Worth

Increasing your net worth can be a lifelong project. The good news is, some of the same habits that foster financial health may also improve your net worth. These basic tips can help you increase your assets, decrease your liabilities and grow your net worth over the long haul.

Pay Down Debt

Paying off high-interest credit card debt can reduce your liabilities and save you money in interest charges. Also, don't overlook the opportunity to pay down other types of debt:

• Make a bigger mortgage payment every month
• Pay off your car loan faster
• Accelerate your student loan repayment

Increase Your Income

While raising your income won't automatically increase your net worth, more income gives you more money to save and invest. Consider taking on outside work or looking for passive income opportunities. Also, take a closer look at your savings account: You may be able to boost interest income by choosing a high-yield savings account or certificate of deposit (CD). Small differences have an impact over time.

Find More Ways to Save

Saving money increases your assets and may help you avoid (or at least minimize) debt when confronted with a large expense.

• Work on a budget. If you haven't already created a plan for managing your income and expenses, start now.
• Reduce your expenses. That includes the money you pay to make and manage your money: investment fees, credit card interest, bank charges and so on.
• Build an emergency fund. Having cash on hand will help you avoid using your credit cards to cover unexpected expenses.

Contribute Toward Retirement

Set goals for funding your retirement and stick to them. Contributing to your employer's 401(k) plan and opening an IRA are two good places to start. Investing in a tax-advantaged retirement account may also save you money on taxes, which can help you stash away even more money or avoid additional debt.

Invest

Buying stocks or other investments can help increase your net worth as these assets appreciate, but your investments aren't limited to stocks, bonds and funds. While a home mortgage adds a significant amount of debt to your portfolio, it will increase your net worth as you pay it off. Even if you start out owning only a share of your home, your equity grows as you pay down your mortgage and your home appreciates in value.

The Bottom Line

Although net worth isn't an absolute measure of financial health, it can help you gauge how the assets you're accumulating stack up against the debts you carry—and how your finances are (or aren't) progressing toward long-term goals. Ideally, a lifetime of good habits like saving, investing and paying off debt will lead to higher and higher net worth.

Along the way, keep an eye on your net worth to help you identify potential problems and course-correct if necessary. Together with strategies for budgeting, investing, career development and monitoring credit, tracking your net worth helps you evaluate—and hopefully celebrate—your financial progress.