How to Think about Net Worth

When you think of net worth, you can automatically imagine celebrities and tech moguls and their lifestyle in the millions of dollars. But everyone should take the time to understand their net worth and how it relates to their daily financial decisions.

Net worth is a basic tenet of personal finance that anyone from recent college graduates to working families and even retirees can benefit from understanding. But, at the same time, it’s crucial to take this figure with a grain of salt.

The average American has $ 90,460 in debt, but the average net worth is $ 748,800. However, since the wealthiest households skew the averages, economists agree that a better indicator of US household net worth is the median, which is $ 121,700.

Net worth is different from income. Calculate equity by taking the total value of your assets (cash, property, etc.) and subtracting your liabilities (i.e., outstanding debt balances).

Mint financial planner Brittney Castro, CFP, warns that many people think net worth is an arbitrary judgment of how much money they should have at a certain age or a sign of someone’s wealth – but in reality , net worth is very nuanced.

Too often, we confuse our net worth with our personal worth, argues Castro. But really, “it’s important that people see it as a report card,” she says.

Each individual must decide for himself how much money he needs to save in order to live and / or retire comfortably. But, at the same time, our life circumstances can change – and sometimes dramatically – so it’s best to think of net worth in terms of a snapshot of how close we are to our goals. Then you can forget about it as you go about the daily work of budgeting, saving, and mindful spending.

Of course, looking your net worth in the face can be intimidating, especially if you have student loans, a mortgage, or other debt that weighs heavily on your assets and cash in the bank. But it can also give you some clarity.

“It helps people think more with an entrepreneurial mindset,” Castro says. When you know where you stand, then you’ll be more inclined to consider ways to create better cash flow or add new sources of income.

“It’s the mentality of the rich,” says Castro. “A lot of rich people follow the strategy of not taking more responsibility unless it is tied to an asset or creates more assets.”

So how does the common person start to embody this “rich mindset” and start increasing their net worth? Coming up, Castro shares some of his top tips with Select.

While many people are reluctant to take on debt, wealthy people borrow with the growth of their net worth in mind for the long term.

“If you want to take out another mortgage or other liability, what can you do to create income from that asset to cover it? Castro asks.

One example is a Bay area couple who, at the time of their marriage, had six-figure student debt and two mortgages. Although their student loans alone were over $ 150,000, they borrowed with the plan that they would aggressively repay the loans once they found a job. They were able to make payments of $ 4,000 per month on the loans and still have enough surplus to cover their living expenses.

While the couple also had two mortgages, they earned passive income by converting a house into rental property. Rent from tenants covered the full cost of the mortgage, allowing landlords to build equity into a long-lived asset that will appreciate in value.

The couple had considerable debt, but they also knew that debt was necessary to increase their net worth in the long run. They had no trouble paying off high interest credit card debt, which never offered any return on investment.

Knowing your net worth can also help you set savings goals.

“You might be thinking, ‘if I saved an extra $ 100 per month, I could increase my savings by $ 1,200 for the year,” says Castro, giving an example of a simple starting point.

Eventually, you’ll begin to look for additional opportunities to earn an additional $ 150, $ 250, or even $ 500 per month as you gain a better understanding of how those short-term gains add to your lifelong financial well-being.

No matter how often you check your net worth, don’t identify with it too much, advises Castro. Ultimately, money comes and goes, and many factors are ultimately beyond our control.

“Some people could have a million dollar net worth and then divorce and half of that is gone,” she told Select. “Don’t connect with your network so much that you start to tie these self-esteem comparisons.”

Instead, think of net worth as a tool, much like a barometer. “Even if it’s negative, just say, ‘Okay, what can I do to improve it? “Really, that’s the idea,” says Castro. “Then look for simple steps to improve it, even reducing your spending by $ 50 per month” can add up over time.

Net worth fluctuates, and that’s normal. Budgeting and expense tracking apps can help you monitor your net worth over time (without obsessing). Many apps give you the ability to link all of your accounts, including checking, savings, money markets, CDs, and retirement accounts, as well as your debts like credit card balances and loans. students.

Personal Capital acts as an investment tool in addition to being a budgeting app, making it easy to see an overview of all your personal finances in one place. Meanwhile, Mint is a good choice when you want to set and meet specific goals, like saving for an emergency fund and paying off debt.

For a total budget update, take a look at You Need A Budget (YNAB), which uses a zero-sum budgeting system that gives every dollar a goal.

Budgeting, like net worth, may seem like an alien concept, but over time it becomes as familiar as other everyday habits like taking out the trash, doing the dishes and making the bed – and you will reap the benefits for many. years to come .