Detailed Explanation
Net worth is the most comprehensive measure of your financial health. It’s calculated using a simple formula:
Net Worth = Total Assets - Total Liabilities
A positive net worth means you own more than you owe. A negative net worth indicates your debts exceed your assets. Your net worth fluctuates over time based on changes in asset values, debt balances, and your saving/spending habits.
What Increases Net Worth
- Paying down debt principal
- Saving and investing money
- Investment growth and dividends
- Property appreciation
- Increasing income while maintaining expenses
What Decreases Net Worth
- Taking on new debt
- Asset depreciation (vehicles, equipment)
- Market losses on investments
- Spending more than you earn
- Inflation eroding cash value
Net Worth Milestones
- $0: Debt-free starting point
- $100,000: First major milestone, compound growth accelerates
- 1× annual expenses: One year of financial runway
- 25× annual expenses: Financial independence threshold
Examples
Positive Net Worth Example
| Category | Amount |
|---|---|
| Home value | $400,000 |
| Retirement accounts | $150,000 |
| Savings/checking | $25,000 |
| Vehicle | $20,000 |
| Total Assets | $595,000 |
| Mortgage | -$280,000 |
| Auto loan | -$12,000 |
| Total Liabilities | -$292,000 |
| Net Worth | $303,000 |
Negative Net Worth Example
- Recent graduate with $45,000 in student loans
- Assets: $8,000 (car, savings)
- Net Worth: -$37,000
- Path forward: Pay down debt while building emergency fund
Why It Matters
Tracking net worth provides the clearest picture of financial progress:
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True Progress Indicator: Net worth shows whether you’re actually building wealth, not just earning more.
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Complete Financial Picture: Unlike income alone, net worth captures assets, debts, and overall position.
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Retirement Target: Your net worth determines when you can stop working-typically 25× annual expenses.
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Decision Framework: Some people consider the impact on net worth when making financial decisions.
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Motivation and Accountability: Regular tracking creates momentum and reveals what’s working.
Many people track their net worth monthly using a spreadsheet to maintain visibility into their overall financial position.