Updated: Apr 30, 2020
Do you know your net worth?
Too often we focus our attention on how much we earn in a year, such as our salary, our commission, or our hourly pay. We care about what we are inputting into our bank account, but we don't think as much about what we're outputting from our bank account. How much real wealth are we actually accumulating?
There are many people with very high incomes that have very little wealth. The Millionaire Next Door describes these people as UAW's (Under Accumulators of Wealth). This is when your wealth is not proportional to your salary and age. There are some people who have very low paying jobs, who can amass an incredible amount of wealth. These are called PAW's (Prodigious Accumulators of Wealth).
Wealth is not about how much you make; wealth is your net worth.
What is net worth?
Your net worth is what you own, minus what you owe. It's as simple as that. Net worth is putting a number on your overall wealth and figuring out where you are. If you had to liquidate all assets and pay off all your debt, how much money would you have (or owe) in cash?
How to determine your net worth
There are several different options. Chris Hogan has a net worth calculator. You can also probably figure this out on your own spreadsheet. For real-time information and graphing, I would highly recommend using Personal Capital. Personal Capital is a great way to keep track of what you own and owe, all in one place. You can keep track of all your banks, credit cards, assets, investments, and have that all right where you can see it.
Personal Capital also updates automatically, so you don't have to update it every few days, like a spreadsheet. It's really helpful and I highly recommend getting it. (If you do get it, please use this link and we'll both get a $20 Amazon gift card!)
What you might owe (Liabilities)
They call what you owe a liability in finance. If you owe something or if you are in debt, then that is a liability. Some examples are:
This whenever your money goes below zero. If you aren’t a math person, just be aware that negative numbers with money are bad.
What you might own (Assets)
They call what you own an asset in the financial world. Assets are sometimes thought of in different ways by different financial advisors. For instance, Robert Kiyosaki only defines an asset as a wealth generating tool. He says your home and cars are not assets, because they don't make money for you.
However, most people do consider a house and cars assets, because you could theoretically sell your house and cars to have cash. Basically, you can think of assets as anything you own that has worth. Examples of assets are:
Commodities like oil or gold
Valuable items you may have such as antiques or a silverware collection
Cash, both in the bank and the green paper
You can learn about average and median net worth among people in the United States here. Now if you end up over the median, that doesn't mean you should get complacent. I would recommend using the formula from The Millionaire Next Door as a better goal.
I am not a financial advisor. I'm not telling you how to manage your money. I am just explaining what I have learned from my own studies. Make sure that you make wise, informed decisions and don't just take my word for it.
Figure out your net worth right now! It doesn't take very long. You can use Personal Capital (sign up with this link) and figure out what your net worth is. Take what you own and subtract what you owe. Do this on a spreadsheet, on Chris Hogan’s site, or on Personal Capital. I don't care how, just do it and see where you are!