• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Wealth Pilgrim

No Money Worries. No Matter What.

Neal Frankle featured in
  • Home
  • Life Insurance
  • Investing
    • Build Strong Investment Building Blocks To Avoid Going Broke In Retirement
    • Systematic Mutual Fund and ETF Investing
    • Stock Market Investing Guide
    • Choosing the Right Investment Brokerage Guide
    • How Bonds Work Guide
    • How Banks Really Work Guide
    • Annuities – What You Need To Know Before You Invest
    • A Beginners Guide To Buying Individual Stocks
    • Create A Pool Of Great Mutual Funds and ETFs To Pick From To Secure Your Retirement
    • ETF and Index Fund Investment Guide
  • Earn More
  • Banking
  • Retirement Planning
    • Retirement Guide
  • Ask Neal a Question
  • Reviews
    • Upgrade Personal Loans Review
    • Lending Club Review
    • Prosper Review
    • Ally Invest TradeKing Review
    • CIT Bank Review
    • LegalZoom Review
    • Lexington Law Review
    • Airbnb Host Review
    • Should You Drive For Uber?
  • Tax
  • Courses
    • Raise Your Credit Score So You Can Buy a House – Free Video Course

How To Figure Your Net Worth – And Use It

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

It isn’t complicated to calculate your personal net worth.  I’m going to show you how to do that. But what does net worth mean? And how do you use this information? These are good questions. First let’s learn how to calculate your personal net worth. Then we’ll consider how to use the term.

What is your personal net worth?

This is simply a number that represents the value of what you have accumulated less what you owe at some point in time. If your assets are worth $300,000 but you owe $100,000 you’re personal net worth is $200,000. Congratulations. You are going in the right direction. You can increase your net worth by:

  1. Saving More
  2. Investing Better
  3. Spending Less
  4. Earning More
  5. Getting Rid of Debt

These are the steps most of us undertake in order to assure long-term financial security.  If your assets are worth $4 gazillion but you owe $5 gazillion, you have a net worth of negative $1 gazillion. This is ugly. Very ugly. You can still use the same 5 tactics listed above to improve your situation. But I recommend you do so in overdrive.

Which would you rather have, a net worth of $100,000 or a negative net worth of $1 gazillion? Of course, most people choose the former.

So keep in mind that having a great deal of assets is fine but having a positive net worth is far more important.  As you get closer to retirement this becomes even more important. Comprende?

How to Determine Your Personal Net Worth

Again, this is really a snap. First list all your assets and what you could sell them for. (Personally, I don’t recommend including assets that depreciate like cars. That’s because they lose value quickly and may not be worth much unless they are collectibles.) Then make a list of what you owe. Here’s an example of a hypothetical personal net worth statement:

 

So in our example, this person has a positive net worth of $446,500 less $172,400 or $274,100. This is good and the person involved here should be proud of what she’s accomplished. But this isn’t where the story ends. Far from it.

How to Use This Information The Right Way

If you are like most people I know, your net worth is important to you because you want to retire someday. You realize that the greater your assets and the lower your liabilities, the greater cash flow you’re going to have.

If this is how you think, you are right. And what this boils down to is that your net worth is important mainly because you can generate income from it at some point. If you have a negative net worth like the person with the gazillions, you won’t generate any positive income. That’s because the debts you have on your assets probably far out-weigh any income those assets generate. Having a negative net worth is a one-way ticket to the poor house friend. Don’t try this at home – or anywhere else.

In our example above the person has a net worth of $274,000 right now. If she liquidates her assets and invests that money (and earns 4%), she’s going to have a little less than $11,000 a year to live on. This is far better than a sharp stick in the eye but it isn’t enough to live on.

Why Your Net Worth Isn’t Anything To Worry About Even if It’s Very Low

If you use any one of the online retirement calculators, they may tell you that you need several million dollars in net worth in order to retire. This news is really depressing and it’s about this time that many people just give up. But don’t be troubled.  In most cases, your net worth isn’t all that important.  That’s because you’ll have more income than you think you will.

Remember, net worth is really only important so long as it relates to your retirement income.  But if your expenses are lower than you project and your income is higher than you project when you retire, you won’t need a big net worth in order to have a very nice retirement.

Are you worried about your net worth?  Why?

Tweet
Pin
Share6

Reader Interactions

User Generated Content (UGC) Disclosure: Please note that the opinions of the commenters are not necessarily the opinions of this site.

Comments

  1. jnew says

    April 11, 2013 at 1:14 PM

    I agree with JoeTaxpayer.

    When I deal with my personal finances (regarding retirement calculations), I deduct the value of my house from NETWORTH calculations as well. Why– ?because retirement planning is all about income replacement and the house will not generate any income for me when I retire. I anticipate selling my home which is paid off– and buying another home for the same or less dollars in a sunny location. It definitely will be helpful not to have a mortgage– but it will not throw off cash to replace my salary.

    Reply
  2. JoeTaxpayer says

    April 10, 2013 at 6:46 PM

    When I look at my net worth, I eliminate the house value, but not the mortgage. For example, $500K in retirement, a $400K home with a $100K mortgage. I tally this as $400K net worth.
    Why? Because the house is not a cash generating asset to provide retirement income. For those whose house is a candidate for downsizing, they may very well pull a bit of money out, but I’d prefer not to count on it.
    So, all things consider, my net worth is what I’d have in addition to the fully paid off house. I don’t see the car as an asset on your list, it’s not on mine either.

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Are You Human? * Time limit is exhausted. Please reload CAPTCHA.

Primary Sidebar

Who is Neal Frankle

Neal Frankle

I'm a Certified Financial Planner™ with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
Read More »

Stay Connected

Facebook Twitter YouTube RSS

More Categories

Career Development
College Funding
Credit Cards
Credit Score Fixes
Money and Marriage
Debt Relief
Estate Protection
Property Investment Loans
Small Business Strategies
Spend Less Money

Disclaimer

Wealth Pilgrim is not responsible for and does not endorse any advertising, products or resource available from advertisements on this website. Wealth Pilgrim receives compensation from Google for advertising space on this website, but does not control the advertising selection or content. Please do the appropriate research before participating in any third party offers. The information contained in WealthPilgrim.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation. Wealth Pilgrim does not provide investment advisory services and is not a registered investment adviser. Neal may provide advisory services through Wealth Resources Group, a registered investment adviser. Wealth Pilgrim and Wealth Resources Group are affiliated companies. In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving payments,access to free products and services for product and service reviews and giveaways. Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.


About · Contact · Disclaimer & Privacy policy

Copyright © Wealth Pilgrim 2021 All Rights Reserved