It’s common to hear a celebrity’s net worth or the net worth of a company, but have you ever taken the time to figure out your own? Your net worth is an important component of your financial identity, and understanding it can help you decide if certain money moves are right for you.
What Does Net Worth Really Mean?
Simply put, your net worth is the remaining balance after you subtract your debts from your assets. To calculate your own net worth, you’ll need to know the totals for both what you owe and what you own.
Your assets include any cash, balances in bank accounts and investments you may have, as well as the current market value of your home and car. If you have other items of significant value, like jewelry, a boat or rental properties, include them as well. When figuring your total debts or liabilities, be sure to account for your current mortgage, credit card debt, loans and any other outstanding financial obligations.
If your net worth calculations result in a negative number, you owe more than you own. But knowing your net worth is only the first step. Is your net worth what it should be for your age or circumstances? How does your net worth compare to your peers’? Seeing how your worth measures up can be a helpful indicator of your personal financial state.
Net Worth Expectations by Age
If you’re in your early 20s, it is not uncommon to have a negative net worth. In many cases, the toll student loans can take on your finances is the cause of that negative number. Still, this is the time to focus on building your net worth and creating financial stability.
Financial decisions made in your 20s often prove to be some of the most critical, as you will likely be making some of your first major purchases at this age. It is crucial to control and manage your debts at this point in your life so you can begin to strengthen your net worth. Practicing good finance early on will make it that much easier to secure a stable financial situation in the future.
Many people in their 30s are working to increase their net worth or correct a negative net worth from their 20s. Having a net worth totaling half of your salary by 30 is a common goal at this stage in life. For example, if you make $50,000 yearly, you should aim to have a net worth of least $25,000.
If you’re uneasy about your personal finances, don’t hesitate to make the necessary changes to boost your cash flow or reduce your expenses. Pay attention to your money trends and take the time to recognize what works and what doesn’t. This way, even if things didn’t go to plan in your 30s, you’ll be on your way to creating a healthy financial foundation for your 40s.
Although Americans currently average a net worth of $35,000 by age 40, those in their 40s should aim to have a net worth equal to twice their annual salary. That number may seem out of reach, especially as you may have more financial obligations on your plate than ever before. However, you’ll likely be moving up in your career and have a more substantial income than you did before.
By age 50, you should be on the path toward a net worth of four times your annual salary. As your children move out, expenses may decrease and savings expand. You’ve also likely been putting been accumulating funds to save for retirement, which is approaching sooner than you may realize at this point in your life.
If having a net worth of four times your salary still seems far-fetched, consider the investments you’ve made and the true value of all of your assets—you may be surprised.
If you’ve been meeting your net worth goals so far, by the time you turn 60, you should have a net worth of six times your yearly earnings. But your retirement plans may impact your net worth and how much you’ll need to say goodbye to your 9 to 5.
Those who have plans to travel, get a luxury rental property or go on extravagant trips with their spouse might need to save more, resulting in a higher net worth. If you’re taking a more modest route, your net worth may not be as high as others’.
Building Your Net Worth
If you find your net worth isn’t where you want it to be, there are several ways you can start making improvements. Whether it be through a side hustle, or a hobby that makes money, it’s never too late to make strides toward bettering your finances. When you foster a net worth mentality, you don’t only reinforce your finances. You lay the groundwork for a comfortable, satisfying life in the long run.