You know how when you go to the doctor, they take certain measurements, like your blood pressure? Those numbers are meant to give you a picture of your physical health.
Well, net wealth is an important number because it gives you a picture of your financial health.
Today, I’m going to walk you through how to calculate your net wealth, figure out what that means for your financial health, and give you some next best steps for improving your financial wellness.
What is Net Wealth?
In a sentence, net wealth calculates the value of what you own (assets) minus what you owe (liabilities).
It’s often called “net worth,” but we try to avoid that phrasing because it’s not actually a representation of your worth; you are a valuable human being, regardless of how many assets you own or how much debt you owe.
Why Does Knowing Your Net Wealth Matter?
Your net wealth isn’t just a vanity metric. It’s a valuable financial metric that can help you make informed decisions and assess your overall financial health.
Net wealth is a useful measure of your overall financial health and can be used to assess your wealth, financial stability, and ability to meet financial goals.
How to Calculate Your Net Wealth
1. List Your Assets
Include all your possessions that have value. Common assets include:
- Cash and Bank Accounts: Total balance in checking and savings accounts.
- Investments: Stocks, bonds, mutual funds, retirement accounts, and other investments.
- Real Estate: The current market value of your home or other properties.
- Vehicles: The resale value of cars, motorcycles, etc.
- Personal Property: Valuables like jewelry, artwork, and collectibles.
- Business Interests: If you own a business, include its estimated value.
2. Calculate the Total Value of Your Assets
This is pretty straightforward. Just take all of the assets you just listed and add up the total value.
3. List Your Liabilities
Include all your debts and financial obligations. This can include:
- Mortgages: The outstanding balance on your mortgage(s).
- Loans: Personal loans, car loans, student loans, etc.
- Credit Card Balances: The total amount owed.
- Other Debts: Any other outstanding debts.
4. Calculate the Total Value of Your Liabilities
Again, just take all of the liabilities you just listed and add up the total value.
5. Determine Your Net Wealth
To calculate your net wealth, subtract your total liabilities from your total assets. The formula is: Total Assets - Total Liabilities = Net Wealth
So, let’s say your assets equal $500,000 and your liabilities are $100,000. That would mean you had a net wealth of $400,000.
There are also net wealth calculators that will do this for you.
The resulting number is your net wealth. If the value is positive, it means you have more assets than liabilities. If it's negative, it indicates that your liabilities exceed your assets.
What Your Net Wealth Means…
But first, let’s talk about what your net wealth DOESN’T say about you.
If it’s negative, it doesn’t mean you’re irresponsible or bad with money. It is not a measure of your worth as a person or what you’re capable of.
The fact that you’re reading this article and calculating your net wealth shows that you’re taking accountability and heading in the right direction!
All right, first, here’s what to do if your net wealth is negative.
- Assess your finances
You’ve already listed out your assets and liabilities. Now, take a look at what you’ve listed. What type of debt is it? Good debt or bad debt? What’s the interest rate?
- Make a debt repayment plan
Focus on paying down high-interest debts first. Prioritize debts with the highest interest rates, as this will save you money in the long run. Consider consolidating debts or negotiating with creditors for more favorable terms.
- Negotiate with Creditors
If you're struggling to make payments, reach out to your creditors to discuss your situation. Some may be willing to negotiate lower interest rates or work out a repayment plan that suits your financial capacity.
- Create a budget
Develop a realistic budget that outlines your income, expenses, and debt payments. Identify areas where you can cut unnecessary spending to free up funds for debt repayment.
- Build a $1,000 emergency fund
Establish or replenish an emergency fund. Having a financial cushion can prevent you from accumulating more debt when unexpected expenses arise.
- Increase your income
Explore opportunities to boost your income, such as taking on a part-time job, side hustle, or freelancing, or pursuing additional skills that could lead to a higher-paying job.
- Invest in Financial Education
Educate yourself on personal finance principles. Understanding how to manage money effectively and make informed financial decisions is crucial for long-term stability.
- Stay Committed
Improving your financial situation takes time and discipline. Stay committed to your plan and celebrate small victories along the way.
Remember that overcoming negative net wealth is a gradual process that requires careful planning and commitment. Taking proactive steps now can set you on the path to financial stability and a positive net wealth in the future.
Now, here’s what to do if your net wealth is positive.
Congratulations on achieving a positive net wealth! That indicates a strong financial foundation.
But that doesn’t mean that you can just sit back and take it easy; you still need to take action to make sure that you’re building wealth and setting yourself up for long-term success.
Here are some steps you can consider to optimize and manage your positive net wealth – and let me know in the comments which of these steps you want to learn more about!
- Diversify your investments
Explore diverse investment options to minimize risk and maximize returns. Consider a mix of stocks, bonds, real estate, and other investment vehicles based on your financial goals and risk tolerance.
How to diversify your investment portfolio.
- Review and update your financial goals
Reassess your financial goals and adjust them based on your current situation. Whether it's saving for retirement, education, or other long-term objectives, ensure that your goals align with your current financial position.
- Build up your emergency fund
How much do you have in your emergency fund?
Ideally, you want to have enough to cover you for at least 3-6 months. If you’re in a position where you have more inconsistent income, like you’re an entrepreneur or freelancer, you may want to save more.
Make sure you have enough saved up to feel comfortable so you won’t have to dip into savings or investments if you need to replace your roof or if you get laid off.
- Continue to Save and Invest
Continue to save and invest wisely. Regular contributions to savings and investment accounts can help you build wealth over time. If you don’t already, automate contributions to make saving a consistent habit.
- Invest in Financial Education
Invest time in expanding your financial knowledge. Stay informed about investment strategies, market trends, and financial planning to make informed decisions about managing your wealth.
Of course, we have programs here at Dow Janes to help you do that, like Million Dollar Year or Wealth-Building Accelerator. Let me know in the comments if you want to learn more about these!
- Build up retirement saving
No matter how young or old you are, it's important to consistently set aside money for retirement. Trust me, it's going to be here faster than you expect, and you want to be prepared.
As a general rule, if you're in your twenties, save 15% of your pre-tax income each month. If you're just starting to save for retirement in your thirties, you wanna save 20% of your pre-tax income. And if you're starting to save for retirement in your forties or your fifties, you save even more because your money has less time to grow before retirement. (We have a video on saving for retirement later in life, which I’ll link in the description!)
You can use an online retirement calculator to figure out exactly how much money you should be saving each month, which makes it much easier.
- Create a weekly money ritual
Schedule regular time to review your financial plan, bills, investment portfolio, and overall financial health. Adjust your strategies as needed based on changes in your life or financial landscape.
Remember that positive net wealth is a valuable foundation, but it requires ongoing attention and management. Regularly reassess your financial situation, adapt your strategies, and stay disciplined in your financial habits to continue building and preserving your wealth.
Final Thoughts
I hope that this has helped you better understand your financial position and how you can best move forward in your financial journey.
If you want tips for upleveling your financial wellness and wealth-building, be sure to check out our free masterclass.
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