By Anthony P. Skvarka, CFP®, CPWA®, AIF®, Senior Wealth Advisor at Halbert Hargrove
What is Net Worth?
Net worth can be defined as the difference between assets and liabilities. It is one of the key metrics used in personal financial planning and is also helpful in measuring financial health and economic stability.
How to Calculate Net Worth in 3 Easy Steps
Wondering how to calculate net worth?
STEP 1: Start by adding up all your assets
Your assets should include:
- The value of your home and other investment properties
- Bank accounts
- Investment accounts such as retirement accounts
- Taxable investment accounts,
- Cars, jewelry, and collectibles.
STEP 2: Then separately add up your liabilities
Liabilities include:
- Your home mortgage
- Car loan(s)
- Debt such as credit cards or student loans
- Alimony or child support
STEP 3: The last step is to subtract your liabilities from your assets to arrive at your net worth.
- If the results are positive (more assets than liabilities), it may be a sign that you are currently on a path to building wealth.
- If it’s negative (less assets than liabilities), then it can indicate that further action may be required.
For example, it would be useful for you to know how much you may be spending on discretionary items like travel and entertainment that are contributing to your liabilities and exceeding your annual income.
Can Budgeting Help Improve Net Worth?
Absolutely. A good budget can help to identify where your money is going and find ways to save more – such as maximizing contributions in your company’s 401k.
Saving more when you are younger pays off! Through the advantage of time: Compounding investment returns can be a significant factor in the growth of your portfolio! Investing early and often means that you may not need to save as much later to help overcome a possible shortfall as you near retirement.
Allocating your resources effectively is critical. It’s important to strike a balance between how much you may want to spend – on discretionary items like buying a new car – and how much you need to spend on taxes and other life requirements. This can go a long way in determining if you can cut back on spending and if you need to save more.
Critical Impacts on Net Worth
- Taxes
- Capital gains taxes owed on any asset sold at a gain– such as your home or an investment in your taxable account
- Annual property taxes to account for if you own a home
- Withdrawals from retirement accounts (except Roth IRAs)
- Taxes you pay on your paycheck
- Inflation and Purchasing Power
They also affect the strength and resiliency of your net worth. The current value of your assets now will not buy the same amount of goods and services in the future. Your investment assets that are allocated for long-term growth need to continue to appreciate above and beyond the annual rate of inflation.
Why Net Worth Changes Over Time & When to Get Help
It is important to keep in mind that net worth can and will change over time. It’s not uncommon to have a negative net worth when you’re younger, building your career, and starting a family. Often, starting out buying a first home can add significant debt in the form of a home mortgage, but as the home appreciates over time and you pay down the mortgage, your net equity in the home should start to exceed the value of the debt.
Understanding how to calculate net worth is important, but it is not the only factor to pay attention to when building a financial plan for your future.
Focus should also fall upon your:
- Short- and long-term financial goals
- Expenses
- Income & other sources –such as cash flow from a rental property
How Can Financial Professionals Help?
Need help getting started? Working with professionals can help you to get onto solid footing. Accountants can help to keep your taxes in order and make sure you are maximizing deductions where appropriate. Insurance agents can provide guidance to make sure your assets and liabilities are protected; estate attorneys will assist in appropriate titling of assets and legacy planning.
Need help getting started? Working with professionals can help you to get onto solid footing.
- Accountants can help to keep your taxes in order and make sure you are maximizing deductions where appropriate.
- Insurance agents can provide guidance to make sure your assets and liabilities are protected.
- Estate attorneys will assist in the appropriate titling of assets and legacy planning.
When Should You Get a Financial Advisor?
Many people assume there is a specific level of net worth at which you should get a financial advisor, but there’s no absolute ‘number’ – every individual’s needs and goals will differ.
Investment advisors can assist with your short- and long-term financial planning, investing, and budgeting, and help you navigate complex financial situations. Connect with an investment advisor today.
Here at HH, we can advise you on all that and much more. We’re committed to staying attuned to your ever-changing life circumstances, in an effort to keep your planning and portfolio on pace.
Disclosure:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.
