Personal Finances

What Is Net Worth and Why Would You Want to Calculate It?

The median net worth of the average American household is around $97,300. This means that half of Americans have an average net worth higher than this, and half have a lower one.

Where do you rank? Do you even know? 

You might be wondering what net worth is and why you even need to know what yours is. 

Here is a guide to help you understand what it is, how to calculate it, and why you might want to determine yours. 

The Definition of Net Worth

Net worth is a term used by lenders, financial planners, and other types of financial advisors. Defining net worth is easiest by learning the basic calculation used for it.

You calculate your net worth by subtracting your debts by the total value of your assets. When you subtract the debts from your assets, you can see how much of your assets you own. Here is the equation:

Assets – Liabilities = Net Worth

Now, let’s talk about how you can calculate your net worth. 

How to Calculate It

Net worth factors in all types of asset classes, including your retirement accounts, stocks and bonds, and financial investments. Therefore, you will need the current balances of all your assets, including every bank account.

You can start by making a list of every asset you own, along with its current value. When you include your house and cars, make sure you write the current value of these assets, not the amount you owe. 

When you add up all your assets, you can move on to your debts. Make a list of every debt you have, including your mortgage loan balance and other loan balances. 

After adding up the total debts, you can subtract this amount from your total assets to reveal your personal net worth. 

Reasons You Should Calculate It

Many Americans never calculate their net worth, yet it is an important tool to calculate for several reasons.

The first reason is to prove you are in a good financial place when applying for loans. Lenders will often ask for the details of your net worth, as they use this information to process loan applications. 

Secondly, you can use this information to find ways to reduce your taxes. If this is one of your goals, check out:

Knowing your net worth is also a great tool for personal financial growth. If you are trying to increase your net worth and improve your financial position, you can use this tool for this purpose. 

To do this, you can calculate your net worth every month, quarter, or year. You can then compare it to your previous net worth to see if it improved. 

Your Net Worth Is Vital to Know

Now that you understand what net worth is and why you should calculate it, are you ready to learn more about yours? If so, you can use the instructions to determine yours. 

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