What is my net worth, and why should I care?
What is my net worth, and why should I care?
What is my net worth, and why should I care?
You’ve heard of net worth, but what is it? And more importantly, what is YOUR net worth? Your net worth is your total assets minus your total liabilities. In other words, what you own minus what you owe equals your net worth. Assets are anything you own that can be sold for cash, whereas liabilities are any monies that you owe someone else. Here are some examples of each:
| Assets | Liabilities |
| Savings (cash) | Credit card balances |
| Investments – including retirement accounts | Student loans |
| Real estate | Vehicle loans |
| Vehicles | Mortgage loans |
| Equipment | Income tax debt |
| Collectibles, jewelry, art etc. | Outstanding bills |
Your net worth provides a snapshot of your overall financial health at a given point in time. As you might guess, having a positive net worth is preferred over a negative one. Also, tracking the improvement of your net worth over months and years can be useful. Some set a goal for their net worth to reach a certain value at some point in the future – such as before retirement.
Many of us are focused on our income and ignore our net worth. Indeed, your income is quite important – after all, spending less than your income is the main way to increase your net worth. However, having a high income does not necessarily translate to a higher net worth. Let’s look at couple of examples of two friends, both in their late twenties:
Teresa makes a salary of $40,000 per year, contributes to her 401(k) at work, rents her apartment, drives a ten-year-old car she bought two years ago for $6,800 cash.
| Assets | Liabilities |
| 401(k): $22,000 | Credit cards: $0 |
| Savings: $12,000 | Student loans: $0 |
| Car: $4,200 | Car loan: $0 |
| Total Assets: $38,200 | Total Liabilities: $0 |
Judy makes a salary of $120,000 per year, does not contribute to her 401(k), recently bought a townhouse, and drives a newer car she bought right after she finished her MBA.
| Assets | Liabilities |
| Townhouse: $350,000 | Mortgage: $335,000 |
| 401(k): $0 | Credit cards: $7,600 |
| Savings: $3,000 | Student loans: $110,000 |
| Car: $22,400 | Car loan: $26,700 |
| Total Assets: $375,400 | Total Liabilities: $479,300 |
From the outside, Judy may appear more financially successful than Teresa. Her income is considerably higher, owns instead of rents, and drives a fancier vehicle. However, Judy’s net worth is negative, -$103,900 to be exact, while Teresa has a positive net worth of $38,200.
What might this comparison look like 30 years from now? Perhaps Judy will build significant wealth over her career. She is starting out with a high salary, and has invested in her own home. Teresa, on the other hand, is starting out with great financial habits. She has so far avoided debt, and is living below her means, enabling her to save money for her future.
Which of these examples do you relate to the most?
Durham Tech Community, for more personal finance advice or tips, email me at chapmanl@durhamtech.edu
Larry is the Financial Coach at Durham Tech, providing individual coaching services and information to the students and employees of the Durham Tech community.