Knowing your net worth is the easiest way to get a clear understanding of your finances. It helps you to paint an all-encompassing picture of your assets, debts you owe, and whether or not you’re on track to meet your short and long term financial goals.
You can either have a net worth that’s positive or a net worth that’s negative. A positive net worth means that you have more assets than you do debt. A negative net worth means you owe more than the total amount your assets are worth. In a perfect world, you want to have a positive net worth - preferably, by a significant margin.
Why is Your Net Worth Important?
While the number itself may fluctuate, your net worth is the easiest way for you to get a clear idea of your big-picture financial situation. And the best part (or worst part, depending on how you look at it) - your net worth doesn’t lie. There’s no estimating future profits, and no making excuses. Your net worth is an honest take on your finances, and can be used as a baseline when creating a financial plan and setting goals for yourself.
What Should Your Net Worth Be?
There is no magic number that defines what net worth you should aspire to. Everybody’s financial situation is different, and you should keep that in mind when you’re calculating your net worth and setting goals.
That being said, the following equation (from Investopedia) can help you get an idea of whether or not you’re on track:
Net Worth = (Your Age - 25) x (Gross Annual Income/5)
Keep in mind that if your total net worth is less than this equation estimates it should be, it’s not the end of the world. Rather than being disappointed in yourself for not having a high enough net worth, evaluate whether or not your current net worth is in line with your long term financial goals.
It’s also important to look at how your net worth has changed over time rather than the exact number. If your net worth has steadily increased over the years, you’re doing something right! On the other side of the coin, if it’s decreased as you age, you may want to take a look at your lifestyle and spending decisions to see where things are going wrong.
At the end of the day, your total net worth is just a number. Whether the above formula lets you know that you’re in the “right” zone for your age, or whether you’re way off track - your net worth shouldn’t be viewed as good or bad. Instead, use it as an indicator of where you are now so that you can work to set attainable financial goals for yourself moving forward.
If you feel that your net worth is negative, or lower than you feel it should be, here are a few next steps to take:
Tony Velasquez is the Founder and Managing Director of Wisely Advised an Illinois Registered Investment Advisor. Wisely Advised provides comprehensive financial planning and investment advisory services to both individual and business clients. You can learn more about Tony and his firm here.
Tony Velasquez runs Wisely Advised, LLC a full-service Registered Investment Advisory Firm offering comprehensive financial planning and investment advisory services to individuals, families, and businesses.
Whether it's traveling, being at the beach, or at his family's ranch in Texas, Tony loves enjoying time with his family and friends.