“What is net worth?” It’s a common question. We hear the term a lot, but it’s not always clear what it means. The good news is that it’s actually a fairly simple concept to understand – and it’s something you can grow. Here’s a rundown of everything you should know.
What is net worth?
Basically, it’s the value of your assets once you deduct everything you owe.
Your net worth can be made of many assets, including:
- Cash
- Investments
- Pensions
- Property
- Cars
- Valuables
While debts can include:
- Student loans
- Mortgages
- Credit card debt
- Car finance
Think of it this way: if you decided to sell everything you own tomorrow, the money you could get back is your net worth.
How do you calculate your net worth?
Luckily, it’s simple to calculate.
- List everything you own.
- Calculate how much each asset is worth. You might have a definite number, or you can use an estimate.
- List all of your debts.
- Deduct your debts from your asset total, and there you have it!
Does it change every year?
It can, yes. Your net worth is just a snapshot of what you’re ‘worth’ financially at any moment in time. For example, once you’ve paid off some debt, it might increase.
Essentially, it’s a useful measure of your overall financial health. If you don’t own much and you are accruing debt, it could be a sign that you need to budget better or start investing in your future.
What’s the difference between net worth and income?
To be clear, they are not the same. Your income is just what you earn each year. You could earn £100,000 and rack up £200,000 in debts, so income doesn’t mean wealth.
Net worth, on the other hand, is what you’re actually worth financially at any given moment in time.
- A earns £50,000 per year but their net worth is £100,000.
- B earns £100,000 per year but their net worth is only £20,000.
A has a greater net worth even though they earn less.
What’s a ‘good’ net worth?
There’s no right answer to this. It all depends on your personal circumstances. Generally, though, it’s good if your net worth grows rather than shrinks over time.
- It can increase with age, but not always. It depends on multiple factors including your spending habits.
- Don’t get too caught up on what you think you should have in the bank by a certain age. It’s never too late to build your wealth!
Is negative net worth a thing?
Yes. If you tally everything up and it turns out you have more debts than assets, your net worth is negative. Don’t panic, though. This is pretty common and it can happen at any stage in life.
More importantly, it’s possible to turn a negative into a positive.
How do I grow my net worth?
There’s no one-size-fits-all approach to this, but here are some tips to help you get started.
1. Start investing
Whether it’s opening a bank account or learning how to buy and sell shares, investing can help you grow your assets over time.
Spend a while researching your options and always get financial advice if you don’t know where to start. Remember that every investment carries some sort of risk.
2. Pay down debt
It’s simple: if you pay down debt, you reduce your liabilities. Sure, it might be a slow process, but it’s part of the long game. Just pay off what you can afford when you can.
Another bonus? Paying off debt can help to boost your credit score.
3. Spend wisely
Some assets, like collectables and real estate, can grow in value over time. Other items, like clothes and furniture, can go down in value. Sure, you need to buy some disposable goods, but try to limit how much money you spend on these items.
You can put the extra towards, for example, your pension, savings or credit card debt.
4. Boost your income
We know that income isn’t the same as net worth, but that doesn’t mean it’s irrelevant. Remember: the more you earn, the more you can put towards savings and investments. You could think about getting a side hustle or finding a way to make money online for more cash.
Takeaway
What is net worth? Well, think of it this way: it offers a useful snapshot of your financial health at any given time. If you need help calculating your net worth, check out an online calculator. And, if you’re worried about how much debt you have, contact Citizens Advice.
