What is Net Worth and Why Should I Care About It?

You may have heard the term “net worth” come up from time to time. It is a bit jargon-y, but it is a big thing in both the worlds of business and personal finance. Somehow adding “net” in front of anything (or “gross” for that matter) always makes it more confusing. At least to me. And I have an MBA. So… don’t tell my teachers or they might revoke my diploma.

Anyhow, today I’ll explain what net worth is within a personal finance context. I’ll talk about how you calculate it (spoiler: there is a lot of disagreement about what should be included in net worth) and also why you should even bother to think about your net worth at all.

Net worth is arithmetic: assets minus liabilities

At the simplest level, net worth is a calculation of all of your assets less all of your liabilities. Your assets include anything you own. Typically, you include only long term assets. What does this mean? That new leather jacket you bought for $500 is probably not an asset. If, however, you purchased a leather jacket that is a collector’s item and could be re-sold in the future for more money, you could potentially consider that an asset.

This is where the gray area of what should and should not be included in net worth comes in. There is consensus in the world of personal finance that checking, savings and retirement account balances belong in a net worth calculation, but that might be where the agreed upon list ends. Some people include cars, some don’t. Some people include houses, some don’t. Some people even include their “individual capital,” which is essentially future earning potential based on skills you possess. You can see how this gets fuzzy pretty quickly.

The liabilities side of the equation is somewhat clearer. Liabilities are essentially debts: anything that you owe another person or institution. This includes student loans, car loans, mortgage loans, etc. The liabilities included in your net worth should tie to the assets. For example, if you include the value of your car as an asset, include the value of your car loan as a liability. The same goes for a home and a mortgage.

Here is a quick summary table of assets and liabilities that should always or sometimes be include in net worth.

net worth 1

A Quick Example

Let’s do a simple example to illustrate how a (theoretical) person might calculate their net worth. Let’s look at a 20-something professional who rents an apartment in New York, doesn’t have a car, and makes $65,000 per year. Their net worth might look something like this:

net worth 2
This example is a pretty simple calculation, as we don’t have to worry about guessing what a home or car’s current value is, or determining if that should be included in the first place. What is useful here is to see that you could easily think that this person is doing very well, having amassed $15,000 in assets. But, it is important to look at the full picture, and when you take into account what is owed in student loans and credit card balances, you get a very different picture. This is not to say that this person isn’t doing well, since they have a relatively modest net worth. It is only to say that you must look at both assets and liabilities to get the full picture.

It is also worth noting that salary actually has no bearing whatsoever on net worth. If you make tons of money but spend it all, your net worth is no better off than if you make a meager salary and live within your means.

Why is net worth a useful tool?

Now that I have taught you how to do subtraction (I know, I’m a really good teacher), you might be wondering why the heck you should care about net worth. Won’t it just be depressing to calculate my net worth? Won’t I just feel like I’m behind in life, like everyone else is doing better than I am?

Here’s the thing about net worth. It should really only be used as a tool to compare yourself to yourself. Looking at your net worth in comparison to another person’s net worth is futile. There are so many different situations and circumstances not reflected in net worth, not to mention the fact that everyone makes their own decision about what to include in net worth. (Note that this probably won’t stop you from comparing your net worth to others. It certainly hasn’t stopped me. Oops.)

Net worth is best used over time, so start today

Do the math and calculate where you are today, including whatever assets and liabilities feel right to you. It doesn’t really matter what you include here, just make sure to include the same things in the future (i.e. if you decide you don’t want to track your home value and mortgage, that’s fine, just don’t add it back in later or it will skew the picture).

Then, at some point in the future (maybe every three months, maybe every year), do the math again. This will help you see where you’ve been and where you’re going. Maybe this will tell a happy story of decreasing debts and increasing net worth. Maybe you’re still in school and it makes sense to take on more debt to finance your education. But maybe you’ll see that your net worth is decreasing without brining you real value, and this will help you see that you need to change. Whatever your story is, knowing the numbers and seeing the change can only help.

Do you track your net worth? What do you include in it? Why do you care about net worth?

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10 thoughts on “What is Net Worth and Why Should I Care About It?

    • That is a great idea! Anything that makes the process easier helps! I use Mint to track mine (in addition to my own spreadsheets) but I haven’t yet tried Personal Capital. I’ll have to look into it!


  1. I track our net worth but don’t include the equity in our house nor my student loan debt.
    I basically only include our retirement accounts both pretax and taxable investments because this is what we will be living on once we reach early retirement.

    I don’t count equity in the home because I have no intention of selling, ever. I don’t count my student loan debt because I am on the public service loan forgiveness program. The equity in the home would more than cancel out the student debt anyways.


    • I hadn’t thought about the student loan forgiveness program but that is a really good point. If you know that a liability will be voided at some point in the future, it probably doesn’t make sense to include it in your net worth. Thanks for sharing!


  2. Huh, never thought about putting in the value of jewelry. The only real stuff of value are two items that my grandmother left me, and I wouldn’t sell those unless it was absolutely necessary. So I think I’ll keep leaving those out.

    I did actually calculate our worth a few months ago and was pleasantly surprised. We’re not impressive on the larger continuum of PF bloggers, but we were more in the black than I had thought we’d be. Which is what matters (to me, anyway).


    • I wouldn’t recommend putting in jewelry, but some people do include it.

      That is great that you were pleasantly surprised by your net worth! And it sounds like you have a great attitude about your net worth – all that matters is how you compare to yourself, not to the PF blog world or anyone else.


  3. I really should start tracking our net worth. It’s kind of a scary thing to do when you know you’ll be in the negative with a mortgage though. Although that probably makes it all the more important to do so we can make sure we are working on increasing that number.


    • Exactly! If you’re nervous about the number that is all the more reason to know what it is. It will give you more fuel to increase it over time.


  4. I would say long-term yes, I do care about net worth. Short-term I am much more focused on increasing income, both side income and through advancing my career. Of course it’s important to keep moving up in the net worth category but overall you are better off focusing on income in your 20s and 30s.


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