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When diagnosing your financial health, there are a number of indicators to use, from your credit score to the size of your retirement portfolio. However, one measure that many overlook is net worth.

Your net worth represents how much wealth you have, measured by assets like a house, cars, 401(k), jewelry or cash in the bank, minus the debt obligations you have, or what you owe. When you understand your net worth, you can make better decisions about what you do with your money, as well as get a clearer picture of how close you are to accomplishing your goals.

What is net worth?

In general, your net worth is your personal balance sheet. It’s a way for you to get a snapshot of where your finances stand right now. Basically, it’s a measure of what you own minus what you owe to others.

“Tracking it gives you a good measure of whether you’re headed in the right direction with a growing net worth,” says Crystal Rau, CFP, MBA, founder of Beyond Balanced Financial Planning.

As you move forward in your financial journey, the goal should be to increase your assets while decreasing your liabilities. The greater your assets, the greater your wealth — and this is especially true if you have fewer debt obligations weighing you down.

How to figure out net worth

The basic formula to calculate your net worth is to add up all of your assets, and then add up all of your liabilities. Once you have those two numbers, subtract your liabilities from your assets. That number is your net worth.

Calculating your net worth:

  • List your assets, including the estimated market value of property, valuables and vehicles.
  • List your liabilities, including all your outstanding balances and debts.
  • Subtract your liabilities from your assets.
  • Track your net worth regularly, at the same time each month or year.

Assets

Your assets are the things you own. They are items of value, as well as items that can potentially provide income down the road.

Assets that you should add up include:

  • Current market value of real estate: This includes the market value of your home, as well as any rental properties or other properties you own.
  • Current market value of your vehicles: Current value of all your vehicles, including cars, boats, motorcycles and other vehicles.
  • Value of your items of significant value: Consider any fine artwork, collectibles, antiques and jewelry that you have.
  • Cash value of your bank accounts: Tally up all the money you have in your savings and checking accounts, as well as certificates of deposit.
  • Market value of your investment accounts: Balances of your brokerage accounts. Your 401(k) and IRA should be included in your net worth calculation.

You can find information about the current market value of some of the assets you own, such as collectibles, by looking on eBay, and using Edmunds or Kelley Blue Book to determine the current value of your vehicles.

Liabilities

Liabilities represent what you owe to others. You should add these up and subtract them from your assets.

  • Mortgages: Outstanding balances on all your property loans, including what you owe on the mortgage of your primary residence, home equity loans, as well as what you owe on rental properties.
  • Vehicle loans: Any money you owe on a car, boat or other vehicle.
  • Credit card debt: Total all of your credit card balances.
  • Personal loans: Any loan you have from an online lender, payday lender, bank or other financial institution.
  • Student loans: Everything you owe on private and federal student loans.
  • Medical debt: Unpaid medical bills, or a payment plan for medical bills — even if you aren’t paying interest.
  • Back taxes and liens: If you owe back taxes, have a payment plan with the IRS or have a lien against any of your property, those amounts should be considered liabilities.

As you might expect, it’s possible that you might have more liabilities than assets after making this calculation. If this is the case, you have a negative net worth. Your goal should be to pay down debt and boost savings to help you bring your net worth above zero.

If you want a little guidance as you figure out your net worth, a net worth calculator can help you include all the relevant assets and liabilities — and do the math on your behalf.

What is a good net worth?

According to the most recent Survey of Consumer Finances from the Federal Reserve, the median net worth for an American family is $97,300. However, for households headed by someone age 35 or younger, the median net worth was just $11,100. It grew to $264,800 for those age 75 and older. However, the “average” net worth of a U.S. family was $692,100, the Fed survey found.

During your lifetime, your net worth will fluctuate, depending on what kind of debt you have, how much your home has grown in value and how much you have in your retirement account. As your finances improve and as you pay down debt, you should see an increase in net worth.

But what makes a good net worth?

A 2019 Charles Schwab survey points out that many Americans consider a net worth of $2.3 million is needed to be considered “wealthy.” However, not everyone thinks you need to have more than $2 million to have a good net worth.

“Really, it’s about the experiences you want to have, and the freedom to pursue those experiences,” says Todd Tresidder, a former hedge fund manager, financial coach and founder of Financial Mentor. “A good net worth is one that allows you the flexibility to live your life comfortably and in a way that enriches you.”

You can compare yourself to others using net worth, Tresidder continues, but tracking your net worth should be more about comparing your current self with your past self. “It’s a way to measure your own financial progress, and you’re the only person you should be competing with,” he says.

There are some time-tested ways to boost your net worth.

“A growing net worth is a sign that you are making smart decisions,” Rau says. “Decisions like saving a portion of your paycheck, growing your investments or paying down debt are all going to improve your net worth.”

How to use your net worth

Knowledge of your net worth can be a useful tool to help you see where you stand today as compared to where you were a year ago or a decade ago. Additionally, net worth can also provide you with a reality check when it comes to determining whether you’re on track to reach your financial goals.

Tresidder suggests that you calculate your net worth on a regular basis. “Decide how often you want to measure your net worth, whether it’s monthly, twice a year or annually,” he says. “The key is to check your net worth at the same time in the cycle. If you look at it at the first of the month, your next calculation should also be the first of the month.”

For many people, income, investment contributions and debt payments are all made on a schedule, so checking in at the same point in the schedule makes sense. It allows you to compare apples to apples.

If your assets and liabilities don’t show you what you want to see, you can use that information to change course and improve your financial picture. When you see a lot of liabilities dragging your net worth down, working on growing your assets or reducing your debt can help you improve your financial health.

You can also use your net worth to reinforce good habits. When you’re hitting your goals, you can see what you’re doing right — and feel encouraged to keep pressing forward.

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