How to Calculate My Personal Net Worth

Key takeaways

• Personal net worth is a measure of the value of assets owned by an individual, minus their amount of outstanding debt. 
  
• Calculating a person’s net worth provides a picture of that person’s financial situation, by which their progress toward long- and short-term financial goals can be measured. 
  
• Saving, investing, and eliminating debt are among key steps toward becoming a high-net-worth individual.
  

The value of assets owned, weighed against those for which there is outstanding debt, is the measure of net worth. One of the key indicators of an individual’s overall financial wellbeing, a positive net worth is one in which the value of assets owned exceeds the total amount of liabilities owed. Predictably, the converse constitutes a negative net worth. While the algorithm for calculating net worth lies within its description, there are nuances to consider. 

With that in mind, it can be useful to understand how to calculate personal net worth. 

Assets vs Liabilities

In terms of calculating personal net worth, assets include checking accounts, savings accounts, retirement accounts and investments. The latter can include the current market value of homes, condominiums, commercial properties, undeveloped land, rental properties, or other assets.

Automobiles, boats, motorcycles and other conveyances can fall under this distinction. This is also true for works of art, collections, timepieces, precious metals and fine jewelry. The cash value of life insurance policies, household items, and essentially, anything that can be converted into cash is considered an asset for the purpose of establishing net worth.

On the other side of the ledger, credit card balances, student loans, outstanding mortgage principals (value of properties, less equity owned in them), loans of any type, as well as any other forms of debt are considered liabilities. 

Simple Net Worth Calculation

The process begins with the summing of the market value of all assets. The next step is the calculation of the total amount of outstanding debt. The difference returned from subtracting the latter sum from the former is the net worth of the individual in question. A positive number indicates healthy finances. 

A negative number is a sign that there is some work to be done to turn the situation around. This can mean increasing earnings to pay down debt, as well as increasing savings and investments. 

Annual Asset Growth Rate

The fact that most assets tend to appreciate is important to keep in mind when performing a net worth calculation. Rather than the original price paid, the asset’s appraisal should be based on its current market value. Recognizing this understanding, the calculation of the annual growth rate of assets can be a useful tool when it comes to a precise net worth calculation.

The mean annual increase in value of an individual investment, portfolio, asset or cash flow is the average annual growth rate (AAGR). In this case, we will say 12 months. The quotient derived from the division of each month’s appreciation by the number of months (12, in this instance) equals the average annual growth rate. 

Average American’s Net Worth

According to the Federal Reserve, the median American net worth as of June 2022 is $122,000.  While this represented a year-over-year increase, it is down considerably from the peak achieved in 2007 of $149,360.

However, there is considerable variance in this number when it is considered in terms of factors such as age and education. 

Age – As of 2019, the most recent year for which these figures are currently available, the median net worth of Americans under age 35 was $14,000. Meanwhile the median net worth of Americans ages 65 to 74 was $266,070.

Education – The median net worth of adults without a high school diploma was $20,780. Among those with a diploma, the median was $73,080. Meanwhile, those with a college degree had a median net worth of $308,800.

Liquid Net Worth

This term refers to the cash an individual would have on hand once liabilities are subtracted from their liquid assets. This, of course, raises the question: what are liquid assets? They’re anything owned that is either cash or can be readily converted to cash.

Therefore, the difference between total net worth (the measure we’ve been referring to herein up to this point) and liquid net worth is the portion of one’s total net worth that is capable of being quickly liquidated. This includes assets such as real property, retirement accounts (for those who have yet to reach retirement age), cars, and jewelry, and the like. In other words, if the owner must wait for a sale to occur or must reach a certain age to access underlying cash, such assets are considered illiquid. 

While total net worth can be useful in terms of garnering an overall financial viewpoint, it does not indicate the amount of cash an individual has on hand. After all, if one needs cash to deal with an emergency, or to take advantage of an immediate opportunity, a home’s value will be of little significance in that moment. 

Personal Net Worth Statement

A financial snapshot of a moment in time of a specific individual, a personal net worth statement provides an assessment of an individual’s financial status. This tool can also be employed when setting long- and short-term financial goals, as well as when gauging one’s progress.

A personal net worth statement can also be useful when it comes to the determination of critical financial decisions. The data contained within a personal net worth statement can highlight areas to attack with a debt reduction effort. A personal net worth statement will also come in handy when applying for mortgage loans and the like, as data contained therein is typically requested as part of the evaluation process. 

Saving and Investing

Among the most critical steps toward becoming a high-net-worth individual are saving and investing. It is important to recognize that wealth, in the vast majority of cases, is built gradually. It seldom happens overnight. A key to this process is leveraging the power of compound interest. 

Paying off debt and establishing a savings account as an emergency fund is also an important step. Eliminating debt frees up cash with which to save and invest, while establishing an emergency fund can help mitigate the need to take on debt in dire situations. Keep in mind that debt is the enemy of net worth. The more it can be avoided, the easier it becomes to achieve a high net worth. Moreover, the more debt decreases, the greater net worth becomes.

With a robust emergency fund established (experts recommend an amount capable of covering between six and 12 months of monthly obligations and expenses), the next step is building a well-balanced investment portfolio. 

Asset Allocations and Alternative Investments

Traditional portfolio asset allocation envisions a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split  of stocks, bonds, and alternatives may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets and collectibles are among asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less correlated with public equity, and thus offer potential for diversification. These assets were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. Yieldstreet was founded with the goal of dramatically improving access to alternative assets by making them available to a wider range of investors.

The resulting diversification can help protect a portfolio of assets during periods of extreme volatility, thus helping to preserve hard-won net worth.