Income tells you how fast water flows into the bucket. Net worth tells you how much water is in the bucket. High income with high spending produces a low net worth. Moderate income with controlled spending builds wealth faster.
The formula
Net worth = Total assets - Total liabilities
Assets: everything you own that has monetary value.
Liabilities: everything you owe.
That is the entire calculation. The complexity is in categorization, not computation.
Asset categories
Liquid assets (accessible within days):
- Checking and savings accounts
- Money market accounts
- Certificates of deposit
- Brokerage accounts (stocks, bonds, ETFs)
Retirement accounts (accessible with penalties before 59.5):
- 401(k), 403(b)
- Traditional and Roth IRA
- Pension values
Real estate:
- Primary home (current market value, not purchase price)
- Investment properties
- Land
Personal property:
- Vehicles (use KBB or NADA value, not purchase price)
- Valuable collections (art, jewelry, coins)
- Business equity
Liability categories
- Mortgage balance
- Auto loans
- Student loans
- Credit card balances
- Personal loans
- Medical debt
- Tax obligations
The tracking habit
Calculating net worth once is interesting. Calculating it monthly is transformative. Monthly tracking reveals trends that annual reviews miss.
A simple spreadsheet with two columns (date and net worth) produces a trend line that is the single best indicator of financial health. If the line trends up, your financial decisions are working. If it trends down, something needs to change.
The rate of net worth growth matters more than the absolute number. Growing from $10,000 to $20,000 (100% increase) is harder and more significant than growing from $500,000 to $510,000 (2% increase), even though the dollar amount is smaller.
Benchmarks by age
The "multiply by" rule provides rough benchmarks:
By 30: 1x annual salary
By 40: 3x annual salary
By 50: 6x annual salary
By 60: 8x annual salary
By 67: 10x annual salary
These are guidelines, not requirements. They assume a target retirement age of 67 and a sustainable withdrawal rate of 4%.
What to include and exclude
Include your primary home and mortgage. Some financial advisors argue against this because your home is not liquid and you need somewhere to live. But the standard accounting definition of net worth includes all assets and all liabilities. Excluding your home distorts the picture.
Do not include future earning potential, Social Security projections, or expected inheritances. These are not assets you currently own.
For tracking your net worth with proper categorization, I built a calculator at zovo.one/free-tools/net-worth-calculator. Enter your assets and liabilities by category, and it computes your total net worth with a breakdown showing where your wealth is concentrated.
I'm Michael Lip. I build free developer tools at zovo.one. 500+ tools, all private, all free.
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