How do you track your family finances? And more importantly, how do you track your progress to your financial goals, beyond just your income and paying your bills every month? The answer is net worth. Learn more about the definition of net worth, why it’s the smartest measure for tracking your wealth, and how shifting your mindset from one of increasing your income to increasing your net worth can be a complete game-changer for your family’s financial success. Get your FREE net worth calculation worksheet at the end of this post!
What is the Definition of Net Worth?
The definition of net worth is truly a very simple formula: total assets less total liabilities.
Essentially, it’s the value of everything you own less the value of everything you owe. And what’s left is your actual wealth.
Wealth is Not How Much Money You Make
We’ve all heard the stories of people who make millions – the movie stars, professional athletes, pop stars, or those who inherit millions, only to end up bankrupt. Your income, the money you bring in every month only adds to your wealth or net worth to the extent that you keep some of it.
Income is cash flow. Wealth is what you grow and hold on to… If every month you spend as much or more than you bring in, be it from income or the earnings your wealth generates, you are not building wealth, you are at best making no progress and at worst, depleting your net worth.
Wealth is Not Just How Much You Own
Outward symbols of wealth are often how we perceive someone’s wealth… but it can be highly misleading.
If someone lives in a multi-million dollar home, drives an expensive car, and dresses head to toe in the latest designer fashion, all you really know is they spend a lot of money. You really have no idea how all that spending is funded or paid for. They could very well be wealthy, or they could have a sizeable income that they leverage to its very limit: a huge mortgage, a big car loan, and credit card debts, with no actual wealth at all.
Using the value of all your assets less the value of all liabilities accounts for this. Someone in the above scenario would see the value of all those assets offset by all their liabilities, leaving them with little net worth.
How Your Money Moves Impact Net Worth
In this week’s episode of Finance Explained, I talk to Andy Hill of Marriage, Kids and Money and how his mental shift from thinking about his finances in terms of net worth dramatically changed his and his family’s finance future.
Understanding that paying off debt has the same positive impact on your net worth as saving does… but more importantly, it frees up your income in the future to grow your net worth even more.
Take a listen to my discussion with Andy to learn more about the importance of motivation and net worth on your family’s financial journey.
Wondering How Your Net Worth Stacks Up?
In general, net worth increases with age… with younger age demographics seeing lower net worths than those who came before them due largely to the rapid growth in student loan debt. Note also that the numbers in the table, based on the Fed’s 2019 Survey of Consumer Finances, do not sum. They are based on the median level of households for each category, and not every household has stocks, retirement accounts, or a mortgage.
Ready to Start Tracking your Net Worth?
Download the FREE net worth calculation worksheet below…
About Andy Hill
Andy Hill is the award-winning content creator behind Marriage Kids and Money – a platform dedicated to helping young families build wealth and happiness.
Andy’s advice and personal finance experience have been featured in major media outlets like CNBC, Forbes, MarketWatch, Kiplinger’s Personal Finance and NBC News. With over 1.3 million total podcast downloads, Andy’s message of family financial empowerment has resonated with listeners, readers and viewers across the world.
When he’s not “talking money”, Andy enjoys roughhousing with his two kids, singing karaoke with his wife and watching Marvel movies.
Check out Andy’s podcast here.
Learn more about Andy’s Financial Journey: