If you’re reading this post, then you’ve likely at least heard of the term net worth. But what does the term mean and why should you care about it?

Net Worth, Defined

Net worth is easy to wrap your head around. It’s the difference between the value of everything you own, and the value of everything you owe. In finance speak, it’s your assets minus your liabilities. So what sorts of things get included in this calculation?

Calculating Your Net Worth

When thinking about things you own, you’ll include things like investments, real estate, and assets that appreciate in value over time (things like works of art, valuable collections, etc.). You could also include vehicles in this category, though I prefer not to because they lose value over time.

When thinking about your liabilities, you’ll need to include all debts. This includes things like your mortgage, student debt, lines of credit, car loans, and credit card debt.

Once you’ve added up all your assets and liabilities, just subtract your debts from your assets. The difference equals your net worth.

Why should you care about it?

Your net worth is one of a few different measures of how you’re progressing toward your goal of retirement. As you move through your career, assuming your goal is to one day retire, you should be making efforts to increase it by investing, paying down debt, and so on.

Said another way: you can’t retire if your net worth is zero. Simple as that.

What is considered a good net worth?

This is a super-subjective question, and I’ve seen so many opinions on this it’s not even funny. One common formula is to take your age, subtract 25, then multiply the result by 20% of your annual income.

So if you’re 40 years old and make $100,000 a year, then the calculation looks like this:

(40 – 25) = 15, multiplied by ($100,000 * 20% = $20,000). $20,000 x 15 = $300,000.

Some would argue that this figure is low for a 40-year-old; others would say it’s just fine, and still others might say that you’re ahead of the game if you’re worth $300,000 at that age.

One thing I’ll say for sure though: if you’re just starting your career and are in your early-to-mid-twenties, don’t worry about having a net worth that is zero or even negative. Everyone does. Things like student debt and car loans will weigh you down until you’re able to work them off and start building savings. When that happens, your net worth will start to grow exponentially!

Wrapping it Up

Net worth isn’t the only measure of financial security, by a long shot. It takes into consideration things that don’t really help you in retirement; your art won’t generate income unless you sell it, for example.

Still, it’s an important tool in your financial toolkit for when it comes to retirement planning. Calculating it even once a year can help you assess whether you’re making progress toward your retirement goals, or whether you might need to make some changes in order to get back on track.

For further reading on planning for retirement, check out this post on determining how much money you need to retire.