For most Americans, net worth has seen tough times over the last few years. The Associated Press reported on December 8, 2011 that the average household net worth fell by 4% recently. What about your personal net worth, has it gone up, down, or stayed flat? Is it positive, or negative? What should it be and what does it mean?
The Basics:
Lets start with the basics - net worth is simply your assets (cash, investments, vehicles, housing, etc) less your debts (credit card, mortgage, etc). Most people can figure their net worth out in less than 30 minutes, yet few people seem to track the progress of their net worth.
Interpreting Net Worth:
Generally, a positive net worth is better than a negative net worth - the larger the net worth becomes the more financially secure you become. A lot of people look for rules of thumb (i.e., if I'm X years old and my income is $Yk then I should have a net worth of $Z); however, I've yet to find a rule of thumb that can be applied as a broad stroke and really make sense. I agree it is interesting to see exactly how you stack up. In fact, as I was recently preparing my own net worth calculation, I was looking for some net worth statistics just to see how my personal balance stacked up. Now, you can't simply look at the numbers reported here, you have to consider the time from which they represent, what was the market doing during that time compared to now etc.
If you're anything like me, then you too may find it's fun to see how you stack-up against these figures. But really, what does your net worth say about you? Well, here are some general interpretations:
Negative Net Worth -
- Most commonly, and appropriately so, people with negative net worth are either first starting out (i.e., have college loans, maybe a new mortgage, and have had very few years of stable income).
- It may be that a person with negative net worth is living at the poverty level.
- However, the most telling are those who are living well above the poverty level, history of stable income, and been in the full-time workforce for some time - there is a strong possibility that they are spending frivolously. Not managing your spending habits is the quickest and most effective way of damaging your net worth.
- Having a positive net worth may mean that you've experienced positive gains on your investments (stocks, housing, etc).
- There are a select few who have a fantastic net worth simply because of an inheritance.
- Generally people with a positive net worth have very little debts and tend to live within their means.
Understanding what your net worth is and the reasons behind it will help you get ahead. Just because you have a negative net worth doesn't mean all hope is gone. Maybe you're just starting out and need time to get traction, or maybe you haven't been managing your finances the way you should; either way, understanding the cause will allow you to make a change. Likewise, just because you have a positive net worth doesn't mean that you've made it to the top and all is said and done. Nope; understand how you ended up where you are and determine where you want to go, understanding this will ensure that your net worth continues to track in the right direction.
Steps to Improve:
If you want to improve your current situation the first thing you should do is understand your current situation.
You can use this personal balance sheet to figure out your net worth - estimated time to complete 30 minutes. Then consider the following:
- Build a budget and keep track of your spending
- Establish your emergency fund
- Focus on paying down debts (you can use an amortization schedule to evaluate additional payments on most debts)
- Invest in your future - make financial investments as well as investments in yourself; furthering your education will pay dividends for years to come
- Monitor. Check-in on yourself and see how your net worth is changing over time.
Net worth is a good tool to begin your financial plan, and keep yourself in financial check. Download the personal balance sheet here and calculate your net worth today.
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