What should my net worth be? Rarely would the answer “it depends” be more appropriate. While only you can really answer this, I’ll give you a framework to help. 
What is Net Worth Anyway and Why Should I Care?
If you’ve never thought about what net worth means, much less calculated it, then this paragraph is for you. Otherwise, skip ahead. Net Worth is a single number that represents the sum total of your major assets and debts. If you cashed out all your accounts and paid off all the debt you could, Net Worth is what’s left. If you need to escape a pesky in-law by moving to a foreign country under a new identity, Net Worth is like the cash you can take with you!
Net Worth is a single number that represents the sum total of your major assets and debts.
You can calculate your own net worth by adding up what you own then subtracting what you owe.
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What about my home?
While not mandatory, many folks include a reasonable estimate of the equity in their home. Let’s say you bought your home for $200,000 a few years ago. You put 5% down ($10,000) and got a $190,000 mortgage, and over the years you’ve paid down $7,500 in principle off the mortgage. This leaves you with a payoff amount of $182,500. You’ve also checked out the rising home prices in your neighborhood to see your house is now worth $240,000. Awesome. Just subtract the current home value from your mortgage payoff to find your home equity.
$240,000 - $182,500 = $50,750
Wow! That’s like an extra 40 grand out of nowhere. Unfortunately, since you won’t be able to capture all of this just by selling, I personally subtract realtor fees and moving expenses. Realtor fees are generally around 6% and moving costs vary widely. Back to our example:
- Subtract Realtor Fees: $240,000 * (1 – .06) = $225,600
- Subtract Moving Expenses: $225,600 – $4,000 = $221,600
- Subtract Mortgage Payoff: $221,600 – $182,500 = $39,100
The $39,100 of home equity can be added to your Net Worth. Although less common, you may want to add or subtract other important assets or debts, like that chest of Inca gold and jewels you’ve been saving for a rainy day.
There are no hard and fast rules, especially if you are tracking this number for your own financial planning. However, it’s important to use a consistent approach month-over-month. After all, we PFM Heroes are looking at the long term. So with that out of the way, let’s clear up some misconceptions. Net Worth isn’t something only the rich care about: in fact, anyone (even my 9 and 10 year-olds) can benefit from knowing where they stand financially.
How Can I Determine What My Net Worth Should Be?
The key thing is trying to guess how much money you’ll need (or want) over some period in your life. Do you have goals? I didn’t really have any until I was in my mid-thirties! Keep in mind that everyone is different, but now I know that I want to retire at age 55 and when I do, I’ll probably need a Net Worth of at least $1.5 million.
Doing some simple math, I expect to live another 30 years and will require $50k to live on for myself and my wife. This assumes a paid-off mortgage and hopefully some reasonable health care plan. Simple enough, but what about earning interest on that money, and what about Social Security and inflation? These are great questions and the fact is, we just don’t know exactly what the future will hold. It’s difficult to determine how much Social Security will help my retirement, and I don’t know what the economy will look like. However, generally speaking, if inflation rises, so does your ability to earn interest. If things turn real sour, I’ll just cut expenses or get a job. Truth is, $1.5 million is FAR GREATER than the average American retires on, which according to CNBC is just $95,776.
The key is figuring out how much money you’ll want during some period in your life.
Your Net Worth May Actually be Negative
Wow, $1.5 million? But I’m just starting out and have a mountain of student debt, which means…a negative Net Worth? Yep. Your Net Worth may actually be negative: don’t freak out! In general, younger folks are going to have a lower Net Worth, and there are many normal reasons for this:
- You haven’t been working long enough to earn as much as those with more experience
- You haven’t had a long time to save or contribute to a 401k
- Your investments haven’t been compounding for very long
- You may have student loans
- You haven’t stepped into home ownership yet
If you are young and your Net Worth is nearly zero, or even negative, remember – the importance of your Net Worth is only relevant to your goals over some period of your life.
Focus on the Life Goal and The Time Period
If you were paying attention, retirement is a pretty big life goal, at least for most people, but it’s not the only one. Many deeply kind-hearted folks wish to leave an endowment to charity at some point in their lives. Others want to give their children a cushion with some inheritance. Many of you may actually want to work forever, while some of you plan to retire at 30. Whatever your goals are, consider them when determining what your net worth should be.
Read more of our articles that help you save more and reduce debt. When you save more and reduce debt, your Net Worth will grow!