In my mid-20s, I vaguely recall coming across the term ‘net worth’ when I was a poor college student. With an epic European backpacking trip still on my gold card and graduate tuition adding up by the quarter, I remember laughing to myself that net worth was something for Robin Leach and the rich and famous. (Yes, that’s a 1990’s name drop.) My wife and I had virtually nothing of value aside from our newlywed love and some nice wedding presents. On the liabilities side, we had plenty. Thanks to living in a fun Portland neighborhood and going to graduate school, we added to our significant outstanding debt by going to college, shopping and eating/drinking out with abandon. 

In those days, net worth was something grownups did. We focused on the minimum monthly payment on our credit card and not overdrafting the checking account too often. At the time, my wife and I had jobs in retail. While I had graduated to selling women’s shoes on commission, my twice-monthly paychecks were spent on lunches in downtown Portland and employee-discounted purchases charged to my Meier and Frank credit card. (20% discount on purchases / 18% annual interest on outstanding balances.)

Net worth vs. not worth

My ‘net worth is for grownups‘ illusion was further reinforced by a gift from my friend Harry (pseudonym) which I received around the same era. Despite graduating from high school the same year as we did, Harry began earning money by collecting and selling recycled newspapers back when he was still in junior high school. (I’m pretty sure Harry had a significant positive net worth when he entered high school.)

One Christmas, I received a gift subscription to Worth Magazine. According to Wikipedia, Worth Magazine was founded in 1986 and “addresses financial, legal, and lifestyle issues for high-net-worth individuals.” While it is now largely distributed via a proprietary database to certain high net worth individuals, I suspect that in the early 90s, you could still get a subscription via Publishers Clearing House. Either that or Harry was already identified as a high net worth individual. 

Worth Magazine was like Vogue or GQ without cars, clothes, or periodic nudity. I remember earnestly trying to read the articles, but it was like reading Достое́вский with the two years of Russian I took in college. Words like investment, taxes, retirement, and financial planning were something from the business section. Pass me the U.S.A. Today!

At the time (and for most of my adult life) I enjoyed consuming things. I was going to college (again). And ‘tomorrow’ was an abstract concept which reared its head monthly (when paying credit cards) or quarterly (when I saw the new balance on my student loans). In between, I lived the illusion of what I call artificial affluence — having sufficient income to sustain habits and lifestyle, but sustained through deficit spending through loans or credit and without sufficient savings for future needs. In reality, my wife and I were poor and living paycheck to paycheck. But I was living in NW Portland, wearing a suit to work, and had a subscription to Worth Magazine….Caviar Dreams, baby! 

In those days, I was financially ignorant, not independent. I was in a state of not worth. 

Calculating your net worth

Let’s get definitions out of the way. Net worth is a simple calculation — what you own vs. what you owe. Technically, it’s assets minus liabilities. 

Speaking from experience, calculating your net worth is far funner when your assets are greater than your liabilities. But you cannot be financially independent without knowing, monitoring, and building your net worth. Period. 

So let’s roll up our sleeves and figure out what you’re worth (financially). Whether you start on the asset or liability side is up to you. If you are married or legally partnered, it might make sense to calculate this individually and as a couple. While you may be profoundly in love at the moment, if you find yourself single again, your assets (and liabilities) might change overnight. If you’re single, you’re single. Unless you’ve been married before….

This is not a complicated calculation. I recommend opening up your favorite spreadsheet tool (MS360, Google, Apple, etc.) Or grabbing a sheet of paper and dusting off your addition and subtraction skills. 

Assets

Assets are pretty simple. They are what you have in a bank account, safe deposit box, bearer bonds, retirement or brokerage account, and/or under your mattress. Add to that the current equity value of property (house, property, car, yacht).

Equity is what the item is worth minus what you owe. Also, unless you have someone already committed to buy your awesome trading card or Hallmark holiday ornament collections, they should not be included because they are considered ‘illiquid’ vs. ’liquid’ assets. 

Income is NOT an asset

Income is NOT the same as assets. If you take home $4000 a month but spend it all on living expenses, bills, and debt payments then this cannot be considered an asset. It is entirely possible to live large via your and others’ income without accumulating net worth. Recall my earlier story of artificial affluence….

Another way to think of income vs. assets is by differentiating between water from a tap and water in a tank. Income is water from a tap — someone provides you with a steady (or spotty) stream of money. But like the water company, an unexpected change in your employment, marital, or other living status can also shut off (or reduce) your flow. By contrast, assets are like water in a tank — saved or accumulated money and value which exists even if/when the water is turned off. (Recall the liquid vs. illiquid comment above.)

Liabilities

Liabilities are also pretty simple. They are what you owe others. The usual suspects are credit card bills, mortgages, and student loans, but can also include child support (when you are paying it) and other financial commitments to others. If you are renting and/or have utility bills, these are recurring costs, but should not be considered in net worth calculations.

If you have a mortgage, your liability is what you still owe, not what you originally made the loan for. This means that a mortgage is often included both in your assets AND your liabilities. When you first take out the mortgage, the liability side of this equation will be significant. Only after some years of payments and increases in the market value of your home will your house become a significant asset. Hopefully.

Assets minus liabilities equals net worth

Do your best to identify what you can for your calculation. Don’t worry if you miss a few bits and pieces. You likely know what the big chunks are. For this first go around, think of this as formative assessment — a snapshot of where you are right now.

Calculating net worth is one of the simplest financial calculations you can make. Yet it is one which few people choose to do. By calculating your net worth, you have made one of the most important steps toward financial intelligence and independence. 

Now, the moment of truth.

• If you owe more than you own, you have negative net worth.
• If your assets are greater than your debts, you have a positive net worth. 

Either way, don’t get too worked up. Read on.

Keep in mind that when you (finally) move from negative to positive net worth, the amounts might seem trivial and not earn you a spot on the mailing list for Worth Magazine. But also know that that measly $312.45 is ALL YOURS. And hopefully it’s earning at least 5% interest!

Net worth over time

Net worth is simply your personal financial balance sheet. And net worth (negative or positive) is just one of several indicators of your financial status. You can have negative net worth and still be comfortable, happy, and successful. This was pretty much my spouse and me for the first 20 years of our life together. You can also have a positive net worth and still feel ‘poor,’ unhappy, and/or unsuccessful. 

When I joked earlier that net worth is something that grownups do, there’s actually some truth to that. Ideally, net worth changes and grows over time. The fact is that when you are young, blithe, and healthy, you are highly likely to have negative net worth for more than a few reasons. In these carefree days, one or more of the following are likely. You may be:

• Renting vs. owning your housing
• Paying for all the cool things in your new digs
• Driving a car which you just purchased on a 60-month loan
• Accumulating or paying student loans
• Etc.

As you grow older and ‘settle down,’ your net worth might slowly begin growing, particularly if you have purchased a house. But even if your assets increase, net worth will continue to be dynamic. 

Here are some ways in which net worth can go up or down.

Net worth modifiers

Net worth ‘downers’

• New baby on the way
• New baby born
• Kid(s) at age 1, 2, 3, etc.
• Buying a boat, RV, and/or trailer full of ‘toys’
• Spouse’s job requires relocation
• Your kid totals the family car
• Roof or furnace needs replacement
• College — yours, partner, and/or kids

New worth ‘builders’

Ways in which net worth can go up

• Rich aunt dies and includes you in the will
• You win the lottery
• You discover Apple stock certificates buried in the wall of your house

But seriously, as you settle into your career and life, there are some legit ways to build net worth including:

• Purchasing and building equity in a home,
• Saving for retirement or child’s college, and
• Paying down credit card or student debt. 

As you can see, the prospective downward forces on net worth are far more numerous and likely than those which might boost net worth.  

Liabilities (debt) and net worth

In your net worth accounting, it may also be helpful to calculate the percentage of liabilities (debt) that are part of your net worth. To do this, simply divide your total liabilities by your total assets. This will translate to a percentage of debt (or liabilities) included in your overall net worth.

Debt is not necessarily a bad thing. After all, someone with $3 million in assets and $1 million in liabilities has a greater net worth than someone with $1 million in assets and no debt. Managed effectively, debt enables you to purchase cars, your home, and send your kid to school. It can also be leveraged to build wealth in other ways. But if your goal is to pay down debt as part of your net worth, you should aim to get to zero when dividing your total liabilities by your total assets. 

Net worth informs financial intelligence and independence

Net worth is a key piece of financial intelligence and helps define whether or not you are financially independent. At age 27, I was a former retail worker / new educator. I was housed, employed, clothed, and happily married, but NOT financially independent. 

Going back to the water tap vs. tank metaphor, financial dependence means that I was dependent on a steady stream of water / income coming through that tap (my paycheck). When I was young and stupid, the loss of my job, the dissolution of my marriage, or a health event could have been catastrophic. Because I had no savings or net worth.

Thankfully, I am in a different place now. My wife and I have net worth. Together, we own a house and an emergency fund. Separately, we each have retirement investments that will complement our future pensions and Social Security. Over decades of saving, investing, and shedding debt, I/we have achieved financial independence. My financial tank is sufficiently full to provide me what I need to live from month to month and to enjoy the lifestyle that I have chosen to live. 

By sharing this, my goal is not to gloat, but to help you understand a few key ideas:

1. You can successfully move from not worth to net worth. 
2. You don’t have to sell a kidney to do it.
3. Patient and persistent reduction of debt and saving works.
4. Educators can build wealth and become financially independent.

1. Craft a simple list and calculate your net worth using the guidance above.
2. Commit to recalculating your net worth on (at least) an annual basis. Some good benchmark times for this kind of accounting include
   • Beginning or end of the school year
   • Beginning of the calendar year (January)
   • When you do your taxes

Next

1. Create a running spreadsheet which includes all of your assets and liabilities that could include
   • Savings and investments
   • Home value (if applicable)
   • Retirement savings
   • Outstanding balances on mortgage, credit cards, or other debt
2. Annually (or quarterly if you’re committed) update all of these items to provide a regular accounting of your net worth over time.
3. Celebrate as appropriate when you:
   • Move from negative to positive net worth
   • See growth from year to year
   • Meet a benchmark goal — having $100K, $500K, or $1 million on your balance sheet