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The voyage toward financial independence is one of the most liberating you will ever take. It might feel like a marathon to get there, but your life will change for the better.
When you’re pursuing financial freedom, you’ll need to calculate your net worth. Your net worth is a magical number that tells you how far along you are on your financial journey toward independence.
How Do I Calculate My Net Worth?
Essentially, your net worth is all of your assets minus all of your liabilities. You can calculate your net worth in several ways: by paper, spreadsheet, or app. There is also a net worth calculator that can help you as well.
If you’re going the paper route, write down all of your assets. Consider retirement accounts, brokerage accounts, savings, and any cash you have littered around your apartment. Add them up. Then write down all of your liabilities. Your credit card debt, student loan, car loan, and personal loans all go into this category. Add these up separately from your assets. Once you’ve got your sums, subtract your liabilities from your assets. And there you have it: your net worth.
I personally prefer the spreadsheet method. I make a column for all of my assets and another for all of my liabilities. I use a formula to do all of my math, which keeps me from making any errors. Once I’ve added my assets and liabilities up, I subtract my liabilities from my assets to see my net worth. As I pay off my loans, I update this sheet and see my new number.
Finally, you can use a personal finance app to track your net worth. This is an extra-easy way. You plug in all your banking information, such as your checking account, savings account, and credit card logins. Then the app keeps up-to-date records of your net worth. Apps like Mint and Personal Capital are great because they track your net worth over time.
Why Calculating Your Net Worth Is Helpful
Your net worth is the best way to measure the state of your finances. When you calculate it, you’ll have an exact picture of where you are currently. You can compare this to where you want to be. If your net worth is high, you’ll be able to tell yourself that you’re close to financial independence. If your net worth is low (or even negative), you’ll be able to set up a smart plan to increase your net worth.
Overall, you’ll have a solid financial picture.
Calculating your Net Worth Helps You Set Financial Goals
Before you calculate your net worth, you might have a general idea of what your money situation is. Your net worth gives you an exact picture of your financial health.
For example, say you have $3,000 in credit card debt and $2,000 in an emergency fund. You might think that you’re doing well because of how hard you’ve saved for your emergency fund. But you’re still net-worth negative because of that credit card debt. Your next goal can be to knock out those liabilities.
What To Do If You Have a Negative Net Worth
Finding out you have a negative net worth can be intimidating. But if you do have a negative net worth, you’re not alone. When I first started tracking my net worth, it was negative. Instead of being discouraged, use this as a call to action to work on paying off your debt.
In addition to giving you a positive net worth, paying off your debt will increase your credit score and set you on a better path for financial independence.
How Your Personal Net Worth Stacks Up
While you shouldn’t ever compare your financial trek with anyone else’s, it can be helpful to see how your personal net worth stacks up to people in your age range. This does two things: It helps normalize your net worth for your age bracket, and it can show you if you have any financial catch-up to play.
According to The Motley Fool, here is the median net worth according to age brackets based on research from 2019.
Median net worth by age (2019)
| Under 35 | $14,000 |
| 35-44 | $91,110 |
| 45-54 | $168,800 |
| 55-64 | $213,150 |
| 65-74 | $266,070 |
| 75 or older | $254,900 |
If you just started working toward financial independence, these numbers may feel shocking. It’s hard to imagine more than $100,000 sitting in your bank account when you can barely make the minimum payments on your credit card or student loan debt.
Instead of letting these numbers intimidate you, allow them to encourage you. Other people your age have amassed wealth, so you can too.
How to Increase Your Net Worth
If your net worth isn’t what you want it to be, you need a plan to increase your net worth.
Pay Off Your Debt
One of the fastest ways to increase your net worth is to pay off any debt. List out all of your debts and decide which one to tackle first. Make sure to list your credit card debt, car loan, and student loan. I personally love tackling the smallest debt and moving to the larger debt once the smallest one is paid off. This method is called the debt snowball.
Another method is to pay off the debt with the highest interest rate and then move to the next highest interest rate. This is called the debt avalanche method.
Both methods will help you get debt-free. But they rely on you staying committed to paying the debt off and not accruing new debt.
When I’m struggling to stay motivated, I remember that the money I put toward my debt is increasing my net worth.
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Start Investing Your Money
Investing is a way to skyrocket your net worth because it allows your money to earn more money on top of it. And you don’t have to start with a ton of money to invest. Even $100 a month can make a huge difference over time.
I always recommend investing in a work-sponsored retirement account first and then a brokerage account second. Retirement accounts are tax-advantaged, and you can leverage this to earn more.
Start a Side Hustle
If you need extra money to pay off debt or invest, starting a side hustle can bring in a couple hundred every month to help meet those goals. You can create a side hustle from almost anything: freelance writing, delivering for UberEats, dog sitting, etc. If you think you can make money from it, you probably can.
Side hustles are great because they’re extra money to put toward your goals. You don’t rely on that money to pay your bills and can put it all toward increasing your net worth. Over time, the hundred or so dollars a month you put toward your net worth will make a huge difference, especially if you’re paying off debt or investing the money.
The Bottom Line
Your net worth is a great tool for achieving financial freedom. You can use it as a tracking measure to ensure that you’re on the right path or as a starting point to grow from. Over time, tracking your net worth will show you how committed you are to your financial health.