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What is net worth, and why is it important?

Here’s how to calculate net worth — find out where you stand compared to the average American.

Updated 5 min read

Net worth is the difference between what you own and what you owe. It’s an important number that can give you a snapshot of your overall financial health.

According to the Federal Reserve’s 2022 Survey of Consumer Finances (the most recent survey available), the median net worth for all families in the United States is $192,300, while the average is $1.06 million. The average figure is usually higher because ultra-high-net-worth individuals and families tend to skew the data. Still, these figures can help us see where we stand.

Curious how your net worth compares? Here’s what you need to know about calculating net worth — and why it matters.

Net worth is the sum total of all assets minus the sum total of all liabilities. This figure can help gauge an individual or company's financial health. For individuals, net worth is often negative in the early years, especially if they have to borrow a large sum of money to attend college.

However, a person’s net worth tends to increase with age. This happens as people increase their salaries, repay debts, and invest. If you include a home in your net worth calculation, reducing the mortgage’s principal while the home’s value increases can also move your net worth upward.

However, these increases are not always linear. Certain situations can derail a person’s net worth, such as a struggling economy followed by the loss of a job. Holding high-interest debt, such as credit cards and personal loans, can also make it difficult to get ahead.

To calculate net worth, start by adding up all of your assets. This can include cash, stocks, bonds, deposit accounts, retirement accounts, valuable items and collectibles, and equity in your home.

Then, add up your liabilities, including auto loans, personal loans, student loans, mortgages, and credit card debt.

Once you have the total of each number, subtract your liabilities from your assets. The resulting number is your net worth. This number can be positive or negative; the goal is to increase this number over time.

Net worth might appear as just another number on paper, but it’s an important gauge of where you stand financially. Knowing your net worth allows you to set financial goals and create a plan to achieve them. In addition, tracking your net worth regularly helps you understand your progress over time. Seeing the number grow can help you stay motivated as you build wealth.

Another reason it’s important to know your net worth is because it’s an indicator of whether you’re on track to be financially secure. The estimated average Social Security payment for Jan. 24 is just $1,907 monthly or $22,884 annually. That isn’t enough for most retirees to live on, especially as costs like healthcare expenses increase later in life. The Employee Benefits Research Center says retired couples should have as much as $383,000 saved just to cover healthcare costs in retirement.

If your net worth isn’t where you want it to be yet, you aren’t alone. It’s definitely possible to increase your net worth, but first, you need to get in the habit of tracking it.

Tracking your net worth is important, but constantly adding all your assets and liabilities can be a chore. Fortunately, several tools and resources are available to help you track your net worth. Examples include:

  • Financial advisers: If you already work with a financial adviser, they may have their own set of tracking tools. They may also be able to give you regular updates on your net worth, as well as devise a strategy for growing it.

  • Budgeting apps and software: Budgeting software such as Quicken's Simplifi money management app are a cheaper solution than working with a financial adviser. Many can link to your financial accounts and automatically update your net worth.

  • Net worth spreadsheet: Perhaps you want to track your net worth independently and don’t feel comfortable linking your financial accounts with a budgeting app. You can use a basic spreadsheet to keep track of your net worth. And there are many templates available online to get you started.

Hot tip: Yahoo Finance readers can try Simplifi free for 90 days. Act now!

There’s no one right answer to what a good worth is, as these figures can vary greatly by age, gender, whether you have children, etc. For instance, in 2022, the median net worth for those under 35 was about $39,000, while the median for those aged 90-100 was $410,100. Given these disparities, it’s best to evaluate your net worth according to your personal goals.

If you have a 401(k), it should be included in your net worth calculation. This calculation is the difference between your assets and liabilities, and retirement accounts are one of the most common forms of assets.

Whether you should count your home as part of your net worth is debated. Those who don’t like to include their home say it’s because they will always need a place to live, so they can’t easily sell their home if they need the money. In addition, homes are illiquid assets that take time and money to sell. Still, some people like to include their home in their net worth calculation because it may be their most valuable asset. While selling a home can be a long and arduous process, it’s still certainly possible to do so, and you can potentially net a large amount of cash in the process.

According to the Federal Reserve’s most recent survey, those aged 35-44 have a median net worth of $135,300, and those aged 45-54 have a median net worth of $246,700. If you are 40 and fall somewhere in this range, you are comparable to the average household.

Still, as mentioned, it’s important to evaluate your own finances and your progress toward your financial goals. Even if you are in line with the average, it doesn’t guarantee you are on track for your personal goals. Consider meeting with a financial adviser to review your finances and set up a personalized plan.

Read more: How much money should I have saved by 40?

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