Even if you manage your finances carefully, you may not be able to estimate your net worth off the top of your head. Net worth is an individual or couple's assets after subtracting liabilities. If you overestimate your assets or underestimate your spending, you won't get an accurate result. Knowing your net worth can help when making decisions about how much you should invest, or how much to save for retirement.
What You're Worth
If you want to figure your net worth, sit down and add up all of your assets: cash on hand, bank accounts, investments, the value of your house and car and yes, IRAs and other retirement accounts. Then subtract all your loans, debts and other liabilities. The result, positive or negative, is what you're worth in dollars and cents. Using a worksheet -- you can find them online and in financial-planning books -- can help by listing categories of assets and liabilities you might forget.
Not Your Available Balance
Your net worth doesn't measure how much money you have available to spend. Suppose your net worth includes $50,000 in a traditional IRA. You usually can't access the money without paying a tax, plus penalties if you're younger than age 59 1/2. Even so, including the IRA in your net work calculation helps give you a rounded snapshot of your finances. When you plan for retirement, for instance, knowing your net worth is, say, $1,000 will lead to different decisions than if your worth is $500,000.
Your net worth, like your IRA, probably doesn't stay the same from year to year. That's why figuring your net worth isn't something to do just once; go back and repeat the calculations year after year. If your IRA and other investments are growing according to plan, your net worth will be growing, too. If you see your net worth stalling, or even shrinking, that's a warning sign of possible problems.
Net-worth checkups are like stepping on a scale, Bankrate.com says: If the numbers keep going in the wrong direction, you need to change what you're doing. With net worth, change requires you to increase your assets or pay down your liabilities. Doing this may require cutting spending, increasing your income or managing your investments more carefully. The net-worth calculation may show you the weak points in your finances. If not, it at least gives you a starting point for figuring them out.
- How Much Money Should a Young Married Couple Have Saved?
- 5 Steps to Strengthen Your Finances
- How to Calculate the RMD of an Inherited IRA
- How to Budget for Family Incidentals
- How to Manage Money Once You're Married
- How to Save 20 Percent of Your Gross Income for Retirement
- What Should Be Contained on a Budget?
- Money Management Exercises