When you want a deeper understanding of your financials, measuring net worth can be a great place to start. Although net worth is associated with celebrities and others with extreme wealth, everyone has a net worth. It's important to know, since your net worth gives you a top-level overview of your finances, including non-cash holdings such as a home, car, or equity in a business.
Although understanding your net worth isn't the most important key to unlock the details of your finances, it's a helpful barometer of where things stand—and where you might be able to make improvements. You can also use your net worth figures to help determine what kind of major purchases you can afford, or even where to cut back in order to make smart financial decisions for the future.
Here's how to calculate net worth, what this number means for your finances, and why net worth is important to track.
What is net worth?
Simply put, your net worth is the dollar amount of your assets minus your debts. By subtracting your liabilities from your assets, you may determine your net worth. You will have a positive net worth if your assets outweigh your liabilities.
This calculation is simple, but important, since you'll be able to glean a broad picture of your personal finances: how much you have in terms of overall liquid capital, the value of your non-liquid assets, and how much of a factor your debts are in terms of your financial holdings.
Why is net worth important?
Net worth is the value of all financial and non-financial assets (such as cash, property, and investments) owned by an individual after liabilities (also known as debts or financial obligations) are deducted.
Bear in mind that your net worth is different from your income. Your yearly income doesn't factor in your expenses and debts. This makes it even more important to know your net worth alongside your income since both give you a more robust picture of your money.
How to calculate your net worth
Simply put, your net worth is the dollar amount of your assets minus your debts. By subtracting your liabilities from your assets, you may determine your net worth. You will have a positive net worth if your assets outweigh your liabilities.
Common assets to include in your net worth calculations may include (but are not limited to):
- Investments
- Bank account balances
- Brokerage account totals
- Retirement account funds
- Homes
- Other real estate
- Automobiles
- Jewelry
- Other outstanding valuables
Liabilities typically include (but are not limited to):
- Outstanding mortgage totals
- Credit card debt
- Personal loan balances
- Student loans
- Medical bills
- Other outstanding debts
For example, a person with total assets of $200,000 and $40,000 of debt would have a net worth of $160,000. To calculate your net worth, all you need is to add your liquid assets to the value of your non-liquid assets (such as a house and a car) and subtract them from outstanding debts (like student loans). If you have a mortgage, the outstanding balance does count against your net worth, so bear this in mind when you measure your net worth.
How knowing your net worth can help you track your financial health
Your net worth is about more than just a monetary figure: for instance, knowing what your net worth is can help you determine if you can afford major purchases. Buying a bigger home or vacation property can weigh down your net worth significantly—something that you may not be able to afford over the long term even if your income is high enough to qualify you for a loan.
When you see financial patterns in black and white on your net worth statements, you're better able to address the basics of your financial situation. Examining your net worth statements over time might help you figure out where you are now and what steps you need to take in order to make desired changes. If your net worth is in line with your expectations, that's great. If you'd like to improve, your net worth will help you figure out what to do next.
How to track your net worth & financial health
Your net worth provides you with a baseline understanding of your finances. It helps you determine where things stand in terms of what you own and how much money you have, as well as what kind of debts might be holding you back from a higher net worth. Plus, it'll help you better understand the underlying value of your non-liquid assets, which may otherwise go unnoticed when looking at your broader financial picture.
Keeping track of your net worth on a yearly basis can serve as a kind of report card on your overall financial health. If your net worth increases, you can usually take that as a sign that you're doing a decent job of staying on top of debts. If, on the other hand, your net worth drops, you can take this as a sign that there might be room for improvement in terms of your spending or borrowing.
No matter what your net worth is, it's always helpful to keep on top of your financial trends. Better still, it's beneficial to partner with a financial institution or professional who can help you determine where to make improvements or how to afford purchases without hurting your bottom line. PNC Bank offers financial knowledge and helpful tools that can help you exercise better financial habits, develop tailored solutions to manage your budget, or devise strategies to make life's expenses easier to navigate. To learn more about what PNC bank offers, visit our website or contact a local PNC Bank branch for more information.
