The process of calculating personal net worth may well be the only exercise in financial planning that savers and investors actually enjoy. After all, it’s fun to tally the fruits of your labor.
Beyond the satisfaction of attaching a dollar sign to your assets, however, financial professionals say that having a net worth statement has real utility. It is the benchmark by which all future financial goals are measured — not to mention an important decision-making tool. It can also help you gauge the potential impact of change, whether it be in your personal circumstances or the world at large. (Related: 3 ways to financially prepare when an election looms)
For example, a personal net worth statement can tell you whether you’re on track to retire on time, buy that beach house, or leave your office job to become a fly-fishing guide.
It can also highlight opportunities to grow your savings by tweaking your investment portfolio allocation, lowering your living expenses, dumping debt to augment your 401(k) contributions, or boosting your income by creating a passive income stream with a side business (or by changing jobs).
“Everyone can benefit from understanding their debt position and how their assets are structured,” said Karl Leonard Hicks, a financial professional in Riverside, California, in an interview. “It’s something we try to do for all our clients every year by updating their net worth statements. There’s a lot of value in having that to compare with previous years.”
One of the biggest benefits, however, is indirect.
“A lot of times, in the middle of their careers, clients might feel like they’re just working and saving, but not getting anywhere,” said Hicks. “With a personal net worth statement, you can see on paper that you’re making a difference and see how quickly you are progressing.”
For added financial clarity, David Bizé, a financial professional in Oklahoma City, Oklahoma, said he often creates an income and expense statement for his clients alongside their net worth statement.
“A personal income and expense statement goes hand-in-hand with a net worth statement because it allows you to see sources of income and expenses while working and retired,” he said in an interview. “It helps you determine how much can reasonably be saved for financial goals as well as project whether your financial goals will be satisfied long term.”
How to calculate your net worth
A net worth statement is a list of what you own (assets) and what you owe (liabilities).
Your assets would include any possessions of value, including:
- Bank and brokerage accounts
- Real estate
- Retirement accounts (IRAs and 401(k))
- Pension plans
- Stock options
- Cash value life insurance
- Other property, such as artwork
To estimate the value of the personal property in your home, Hicks said a good rule of thumb is to use 25 percent to 30 percent of its fair market value. That, incidentally, is often the maximum amount that homeowner’s insurance policies will cover without a property rider.
“That, then, prompts the question of whether that [homeowner’s insurance policy] would be enough coverage to replace their house, plus all the contents within their house, if everything was lost,” he said. “One of our clients had a valuable wine cellar and another was a collector of baseball memorabilia, so the answer for them was definitely not.”
Keep in mind that if your house has appreciated significantly in value since you purchased your homeowner’s insurance policy, which may be the case in high-priced markets like New York and California, you may be underinsured. As you complete your net worth exercise, take a moment to review the amount of homeowner’s coverage you have and take steps to ensure that your home and its contents are adequately protected, said Hicks.
Into the liability column falls any debt you may have, such as:
- Car loans
- Student loans
- Credit card balances
- Child support
- Back taxes
- Medical debt
To calculate your net worth, simply subtract what you owe from what you own. If you own more than you owe, your net worth will be positive. If you owe more than you own, it’s negative.
While appearances can be deceiving, the numbers never lie. Your neighbor with the big house and the luxury cars, for example, may exude a high net worth lifestyle, but if they’re up to their nose in debt, or not saving for their retirement, they may have a smaller net worth than the family next door who lives more modestly.
Need help defining your financial goals? MassMutual’s online tool provides a simple strategy for setting two short-term goals and two long-term goals.
How do you stack up?
Wondering how your net worth stacks up? That depends on the yardstick.
According to the U.S. Federal Reserve, the average net worth of all families in the U.S. rose 26 percent to $692,100 between 2013 and 2016, the most recent year for which data are available.1 But the average net worth by age group breaks down as such:
Younger than age 35: $76,200
Ages 35-44: $288,700
Ages 45-54: $727,500
Ages 55-64: $1,167,400
Ages 65-74: $1,066,000
Ages 75 and older: $1,067,000
Beyond the national average figures, other rules of thumb exist, including the one that suggests your net worth should be roughly equal to six times your annual salary by age 60, or that your net worth by age 72 (the new age at which required minimum distributions from your IRA must begin) should be 20 times your annual spending. Other financial pundits suggest that you should aim to be net positive by age 30, and have twice your yearly salary socked away for retirement by age 40. (Learn more: 3 points to know about the SECURE Act’s retirement rule changes)
Feeling deflated? Don’t. The ideal net worth—at any age—differs for everyone and depends on your lifestyle, geographic location, income potential, and investment returns. The age at which you plan to retire also plays a role. (The longer you work beyond your full retirement age, the less you need saved.)
At the end of the day, all that matters is that your net worth is appropriate for your future financial plans and that you are on a course to meet your financial goals.
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1 U.S. Federal Reserve, “Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances. Table 2: Family median and mean net worth, by selected characteristics of families, 2013 and 2016 surveys,” September 2017.