Net worth is a measure of your financial well-being. It will help you track how close you are to your financial goals. In isolation, it gives you some sense of how wealthy you are. But if you track it quarterly or even annually, it should tell you whether you are getting close to or far from your financial goals. According to a 2019 survey by Charles Schwab, on average, Americans believe it takes an average net worth of $2.3 million to be considered wealthy.
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Your net worth is just the sum of all your assets minus all your liabilities. Your aim should be to increase your worth. Let me break down the components for you.
Liquid assets – Any assets that can be converted fairly quickly into cash without loss of value. These include your cash in savings and checking accounts, and cash-like securities such as money market accounts, treasury bills.
Investment assets include all of your stocks, bonds, retirement assets, real estate investments, rentals, etc. Stocks and bonds may be liquid but if you need to convert them into cash, there is a chance that you may have to sell them at a loss. If you have an interest in a non-public firm, be sure to include an illiquidity discount in valuing it.
Your personal assets are the toughest to liquidate. These include your home, vehicles, personal property such as jewelry, art and antiques, etc.
In liabilities, include all your credit card bills, mortgage you owe, auto loans, business loans, student loans, and any other payables you may have.
Finally, your net worth will be the total of all your assets minus all your liabilities. Now, if your net worth is a high number and you are happy with it, great! If it is low, or even negative, do not despair. At least you know that there is a problem and you can address it.
How do you increase your net worth? It’s simple. Reduce your liabilities and increase your assets. Save money and invest in good assets. Pay down your liabilities. There is no limit to how much you can grow if you have the will.