Laurence Hale, AAMS®, CRPS®
Principal/Managing Partner, Investment Advisor & Chief Investment Officer
We hear a lot about net worth, but what exactly does net worth mean and why does it matter? Here’s a look at what net worth is, how to calculate it and the important role it plays in your finances, your investment strategy, and your ability to reach your financial and life goals for the future.
What Does “Net Worth” Mean?
Net worth refers to all of your assets minus liabilities, or what you own minus what you owe. For example, if your house is worth $1,000,000 and you have a $500,000 mortgage, you own $500,000 in equity.
How do you Calculate Net Worth?
To calculate your net worth, first, take an inventory of everything you own. Net worth generally includes cash, investments, property, vehicles and anything else you own. To get an accurate estimate for depreciating assets (such as cars), you may need to research how much they are currently worth. Remember, your net worth can include assets you are paying off (such as a home) because you will subtract what you owe.
Here are some things you should include when calculating your net worth (although this list isn’t exhaustive):
- Cash, including checking accounts, savings accounts, CDs (certificates of deposit), and other cash
- Investments, including stocks, bonds, mutual funds, securities, treasury bills, bullion (silver, gold, etc.), and other investments
- Property, including real estate (market value), investment properties, vehicles, jewelry, art and collectibles, and other property
- Retirement funds, including retirement accounts (IRA, 401(K), pension plans, etc.), social security and any other retirement assets
Once you have an inventory of everything you own, subtract what you owe. Some examples of liabilities include auto loans, mortgages, credit card debt, consumer loans, student loans and unpaid taxes.
After subtracting your liabilities from your assets, you will have your net worth.
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Net Worth, Financial Health and Your Life Goals
A lot of people talk about net worth as a part of your financial health and while it’s an important part, it’s only one part of your overall financial picture. There are many caveats and considerations to take into account.
For example, net worth doesn’t include your annual income, so someone with a high annual income but with higher expenses could have a lower net worth than someone with a lower annual income that invests in appreciating assets. Those focused on growing their net worth may consider investing in appreciating assets and lowering their debt and liabilities.
In addition, net worth may have implications on your taxes. Your tax bracket may be determined by your annual income, but those brackets don’t necessarily include net worth.1 So if you are a high-income earner, and have a high debt-to-income ratio, and are in one of the highest marginal rate tax brackets, you may accumulate net worth much lower than someone who makes less money annually, but has less debt, more appreciating assets and is in a lower tax bracket.
When working with our clients, we consider net worth as one important component of financial health, but we also consider lifestyle and what is impacting whether or not you are accumulating wealth. As part of our strategic Plan Well, Invest Well, Live Well financial planning process, we’ll also look at your investable assets, which is the amount of money you have ready to invest. Net worth can be tied up in property or other investments and may not be liquid enough to invest, so it’s important to build your financial strategy on a thoroughly researched foundation that considers every aspect of your current finances in relation to your future goals.
We can help you to build a strategy that will leverage your current net worth and overall financial picture to help you achieve your goals. Learn more at our website and contact us at (860) 928-2341 or firstname.lastname@example.org to get started.
Presented by by Principal/Managing Partner Laurence Hale AAMS, CRPS®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.