Net Worth is the market value of all of your assets and liabilities. It’s the primary measure of your wealth. When someone asks if you are rich, they mean do you have a high net worth.
Net worth is all about the cash equivalent value of everything you own and owe. It will not tell you if you are intelligent, if you’re a good person, or if people will laugh at your jokes.
Sometimes, Net Worth is described as your Net Assets or your Investments.
So, what is my net worth?
To get a grip on your finances, or to aspire towards financial freedom, a key step is to understand your net worth. So, what is the net worth formula?
What is the Net Worth Formula?
Net worth is calculated as follows:
Net worth equals total market value of personal assets less personal liabilities on a certain date.
What is a Personal Asset?
Personal assets is anything you own that has a market value. In other words, the asset could be sold and covered into cash in the future.
Some personal assets are physical – like a gold bar, a painting by Picasso, or your beaten up car.
Other personal assets may only exist on paper – like share certificates and bank notes.
Types of personal assets:
- Bank deposits
- Money in a piggy bank
- Stocks and Shares in a company
- Commodities – like pork bellies and wheat
- Loans to friends and strangers
- Inverstment Property / Real Estate
- Home for personal use
- Overpayments on bills
- Collectables – Artwork, Wine, Classic Cars, Watches, Memorabilia
- Bitcoins and other crypto-currencies
Any transactions costs associated with the sale of an asset should also be factored in. So if you own a house, but the cost to sell it is 3% of the total cost, then your net asset is worth 97% of the market value. This is because you cannot access the full market value. Transaction costs could be taxation, sales agent fees etc.
What is a Personal Liability?
Personal liabilities are amounts that you owe to some other person or company. Essentially, any amount that you owe on a certain date, where you will have to settle in future, is a personal liability.
Types of personal liabilities:
- Bank loan
- Loan from a friend
- Pay day loans
- Credit card debt
- Mortgage on your own property
- Mortgage on an investment property/ real estate
- Car loan or financing
- Student loan
- Amounts owed on bills like gas, electricity and water
How to Value your Personal Assets and Liabilities
All of these personal assets and liabilities should be valued at market value. Market value is how much money you would receive if the asset was sold.
Some market values are fully known – like a cash deposit. Some have a very close to live price, like listed shares. Others will only have an approximate value because they are sold less often – for example your own home.
You don’t assume you have to sell instantly. Instead, you assume a sale over the normal course for that kind of an asset.
The valuation is only for one specific point int time.
Your net worth will change on a daily basis, depending on the changing value of your personal assets and liabilities.
Calculating your Net Worth
Simply, you write down the estimated market value on a particular day for all of your personal assets and liabilities, the subtract the liabilities from your assets. That is your net worth.
Example of Calculating Net Worth
Here’s what a typical net worth statement might look like.
You should look at the trajectory of your net assets every month.
What should my Net Worth be?
There is no right answer to what your net worth should be.
At the time of writing Jeff Bezos, the owner of Amazon, has the highest net worth in the world at $185.8 billion
Why does Net Worth Increase as You get Older?
Generally, you expect net worth to increase as you get older because:
- You’ve had more time to earn.
- Your average wage increase over time on average.
- You are more likely to have inherited money from family members the older you get.
- You have had more time to benefit from capital gains and compound interest.
- If you have kids, they eventually earn for themselves and stop being dependent on you.
- If you own a home, you build equity as you pay the mortgage down.
- You have spent longer investing in a pension.
In fact, you’re net worth tends to accelerate as you get older because the points above leverage off one and other.
How much Net Worth do I Need to be Financially Independent?
If you are financially independent, you expect to be able to live off your net assets or net worth for the rest of your life.
The lower your annual expenses and the higher your net worth, the more likely you are to be financially independent.
You can use the Financial Independence Formula to get a quick snapshot of how high your net worth would have to grow to be financially free.
What should my Net Worth be at 30?
Average net worth for under 35s in the United States is $76,200. Source: MarketWatch
Up until your mid-thirties, you generally have few assets. Your net worth is low and quite possibility negative. Student loans, credit cards, and low income mean that saving is difficult for the average young adult.
What should my Net Worth be at 40?
Average net worth for 35 to 45 year olds in the United States is $288,700. Source: MarketWatch
During your thirties and forties you’re likely to get married, buy a house, have kids, and spend huge amounts. Your net worth will drift up unless you take determined steps to drive it upwards.
What should my Net Worth be at 50?
Average net worth for 45 to 55 year olds in the United States is $727,500. Source: MarketWatch
By you mid fifties, you’re likely to be at your peak earnings, your kids are older and possibility left home, your house is paid off or close to it. You’re starting to have serious equity locked in your house and pensions are growing. You will probably have cash reserves you can access in an emergency and investments.
What should my Net Worth be at 60?
Average net worth for under 55 to 65 year olds in the United States is $1,167,400. Source: MarketWatch
Remarkably, the average American will be a millionaire by the time by their mid sixties. The largest assets they hold are the equity in their home and their pension.
How do you get an Above Average Net Worth?
Do you want to be the average Joe, who slowly accumulates assets, mostly locked in pensions and house equity? Forcing you to be financially dependent?
There is an alternative. And that’s to aim for financial freedom. To become financially independent you’ll need to control your spending, find ways to increase your income and ensure you improve your investment returns.