What exactly is 'net worth' and why should I care?

Your family’s worth can’t be measured in dollars—nor should you try. Measuring your family’s net worth is a key way of measuring financial health and progress.

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  • Your family’s worth can’t be measured in dollars—nor should you try. Measuring your family’s net worth is a key way of measuring financial health and progress.

  • Net Worth

  • Net worth refers to the difference between the sum of all of your assets minus the sum of all of your debts and liabilities.

  • Assets

  • Assets are all of the things you own. Your house and car are assets. Your retirement savings and your college fund for the kids are also assets. If your life insurance has an investment feature the cash value of that investment is an asset — the amount of the benefit you receive when you’ll die is not yet an asset. The cash in your bank account, the value in your flexible spending account at work or your Health Savings Account are all assets. When you stop to think about it, you have lots of assets.

  • Liabilities

  • Your liabilities include your mortgage, your car loan and credit card balances — even if you pay them off every month. If you have a debt to anyone for any reason, a balance owed to the dentist, a bill outstanding to a contractor who did work on the house, anything like that, it is a liability.

  • Calculating Net Worth

  • You can calculate your net worth by deducting the total of your liabilities from the total of your assets. Assets – Liabilities = Net Worth.

  • Reference Points

  • American families headed by someone under 35 years old have a median net worth of just $11,800, meaning that half of families headed by someone age 35 have a net worth of less than $11,800. Those 55 to 64 years old have a median net worth of almost $254,000. Again, by definition, half of families have less than that.

  • How Much Is Enough

  • ? There are a variety of ways to think about net worth. Considered primarily as a measure of retirement readiness, you may wish to target a net worth on the order of 10 to 15 times your pre-retirement household income. So, if you have an annual income of $75,000, a net worth at retirement of $750,000 may be enough to carry you through retirement with a lifestyle similar to your pre-retirement lifestyle. A net worth of $1.1 million would make that level of comfort almost certain. Of course, this is an oversimplification, a simple rule of thumb.

  • Home Equity

  • : Much of your net worth will be in the equity in your home, which is — thankfully — difficult to spend. At some point near retirement you may choose to sell the home where you raised your children and move to a smaller condominium, freeing up some of that equity to be invested in assets that will generate cash for your retirement.

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  • Pension Plan

  • If you have a traditional, defined benefit plan where your employer has committed to provide you with an income after your retire based on a formula, there is no one who can or will tell you what that is worth exactly for calculating your net worth. It is a big asset and one that is important to your retirement. You could ask a financial advisor to help you make a careful estimate of its value. As a simple guesstimate, you could multiply the annual income you’ll receive by ten (for a complex set of reasons beyond the scope of this article) and that would give you a rough estimate. If your pension will pay you $25,000 per year, multiplying by ten yields about $250,000.

  • Once you make a calculation of your net worth, you should find it relatively easy to update that estimate. Doing so at least once each year will allow you to track your financial progress over time.

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Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.

Website: http://www.yourmarkontheworld.com

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