You track your checking account balance, monitor your 401(k), and watch your credit score. But you don’t have a clear picture of your overall financial health. Are you actually building wealth, or just maintaining? You’re not sure if you’re ahead or behind for your age, or whether your financial decisions are moving you forward.
Net worth—the sum of everything you own minus everything you owe—is the single most important financial metric. Here’s why it matters and how to track it effectively.
Understanding Net Worth
The basic formula:
Net Worth = Assets – Liabilities
Assets (what you own):
- Cash in checking and savings accounts
- Investment accounts (401k, IRA, brokerage)
- Home value (if you own)
- Vehicle value
- Other valuable possessions (jewelry, collectibles)
Liabilities (what you owe):
- Credit card balances
- Student loans
- Mortgage balance
- Auto loans
- Personal loans
Example:
Assets: $15,000 savings + $45,000 retirement + $250,000 home + $12,000 car = $322,000
Liabilities: $200,000 mortgage + $8,000 car loan + $25,000 student loans = $233,000
Net Worth: $322,000 – $233,000 = $89,000
Why Net Worth Matters More Than Income
Income tells you how much you earn. Net worth tells you how much you’ve kept:
The high-income, low-wealth trap:
Someone earning $150,000 but spending $145,000 builds minimal wealth. Someone earning $75,000 but spending $55,000 builds substantial wealth. Income creates potential—net worth measures actual progress.
Measuring what you control:
You control spending, saving, and investing—all reflected in net worth. You have less control over salary increases or market returns. Net worth captures the results of your financial decisions.
Retirement readiness indicator:
Financial independence depends on net worth, not income. You need assets that generate income or can be drawn down. A high salary with low net worth means you must keep working. High net worth with moderate income means options.
Net Worth Milestones by Age
General guidelines (not rigid rules):
The 1x salary rule:
By age 30, aim for net worth equal to your annual salary. By 40, aim for 3x salary. By 50, aim for 6x salary. By retirement (67), aim for 10x salary.
Alternative age-based targets:
- Age 25: $10,000-25,000 (building foundation)
- Age 30: $50,000-100,000 (establishing wealth)
- Age 40: $200,000-400,000 (accelerating)
- Age 50: $500,000-1,000,000 (peak accumulation)
- Age 60: $1,000,000-2,000,000 (pre-retirement)
These are averages for middle-to-upper-middle class. Don’t panic if you’re behind—focus on the trend, not the absolute number. Negative net worth in your 20s is common. The key is improving every year.
How to Calculate Your Net Worth
Do this quarterly (four times yearly):
Step 1: List all assets
Use current values. Check bank balances, investment account statements, Zillow estimate for home, Kelly Blue Book for vehicles. Be conservative—use lower estimates when uncertain.
Step 2: List all liabilities
Current balances only—not monthly payments. Log into each loan account for exact balance. Include all credit cards, even zero-interest promotional balances.
Step 3: Calculate net worth
Total assets minus total liabilities. Simple math. This is your baseline.
Step 4: Track over time
Record the number in a spreadsheet or app. The single number matters less than the trend. Is it increasing? By how much? That’s wealth building in action.
What to Include (and Exclude)
Always include:
- All cash and investment accounts
- Primary residence current value
- Vehicles
- All debts
Consider excluding:
- Personal possessions (furniture, clothes, electronics)—depreciate quickly
- Pending inheritances—not yours yet
- Future pension value—complicated to calculate
The simpler your calculation, the more likely you’ll maintain it. Focus on major assets and all debts.
Understanding Net Worth Growth
Your net worth grows three ways:
Savings:
Money you add to assets. Every dollar saved increases net worth by one dollar. This is completely within your control.
Debt reduction:
Every dollar paid toward principal increases net worth. Paying off a $5,000 credit card increases net worth by $5,000, even though your cash decreases. The liability reduction matters more.
Asset appreciation:
Investments growing, home value increasing. This happens without additional savings. You have some control (choosing good investments) but can’t force returns.
Realistic annual growth: 10-20% of gross income for aggressive savers, plus investment returns. Someone earning $60,000 might increase net worth by $10,000-15,000 annually through savings and debt payoff, plus 7-10% investment returns.
When Negative Net Worth Is Normal
Negative net worth isn’t always catastrophic:
Recent graduates:
Student loan debt often exceeds early assets. Starting at negative $30,000-80,000 is common for college graduates. The key is improvement—less negative each year.
Recent home buyers:
Large mortgage with small down payment can temporarily reduce net worth. A $400,000 home with $20,000 down and $10,000 in closing costs might initially lower net worth if you depleted savings. It recovers as you build equity.
The trend matters more than the starting point. Moving from -$50,000 to -$30,000 is real progress.
Tools for Tracking
Simple spreadsheet:
Columns for date, total assets, total liabilities, net worth. Update quarterly. Create a simple line graph showing growth over time. This visual representation is powerful motivation.
Automated apps:
- Personal Capital: Free, comprehensive, good investment tracking
- Mint: Free, basic net worth tracking
- YNAB: Paid, excellent for active money management
Apps automatically update with linked accounts. Less manual work but requires trusting third parties with financial data. Choose based on your comfort level.
The Bottom Line
Net worth is the ultimate measure of financial progress. Income, salary increases, investment returns—all matter only insofar as they increase net worth. A high income that doesn’t translate to growing net worth is wasted potential.
Calculate your net worth this week. Write down the number. It might be disappointing. That’s okay—you’ve established the baseline. Now commit to tracking quarterly and watching it grow.
Every financial decision you make—spending less, saving more, paying down debt, investing wisely—shows up in your net worth. That number tells you if you’re winning or losing at the wealth-building game. Track it, grow it, and watch your financial life transform.
