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Key Takeaways
- You measure net worth by subtracting liabilities from assets.
- You can compare your net worth with your peers once you know your net worth.
- You don’t need a big income to achieve a good net worth, but you will need good savings habits.
- You can improve net worth by increasing income, bolstering savings, lowering spending, and paying down debt.
Calculating your net worth is a way of measuring your financial health. You can check it every few months to see how well you are moving ahead or falling behind on financial goals. It is also a good indicator of how you stack up financially with other members of your class. Regardless of your social class, your net worth is a good indicator of the overall state of your finances.
“Net worth is a way to measure the value of what you own compared to what you owe. It is the single best indicator of your overall financial situation,” says David Huebner, a certified financial planner at Huebner Financial Planning.
How to Calculate Net Worth
To determine your net worth, you’ll need to subtract what you owe, your liabilities, from what you own, your assets.
Not sure of your assets and liabilities? Huebner offers these examples. Assets may be your home, certificates of deposit (CDs), money market funds, investments, retirement accounts, and business accounts. Liabilities may be car loans, your home mortgage, credit card debt, and student loans.
Why Net Worth Is an Important Measure of Your Finances
Assessing your net worth over time will help you see whether or not your finances are moving in the right direction. Are you on your way to achieving your financial goals? Tracking and regularly analyzing your net worth will tell you.
“Net worth helps view your entire financial situation, but it’s only a snapshot in time. When net worth is tracked over time, it helps indicate the direction of one’s financial health,” Huebner says. “An increasing net worth indicates positive financial decisions, leading to wealth accumulation. A net worth which remains level or tracks negative over time can indicate excess spending or high debt levels relative to assets.”
Do You Need a Good Income to Achieve a Good Net Worth?
You don’t have to have a big income to achieve a healthy net worth.
“Achieving a good net worth is more about how much you keep, not how much you earn. There are plenty of individuals in high-income situations who struggle with a low net worth because of excess spending and high debt levels,” Huebner says. “A disciplined saver with an average income can accumulate significant wealth over time. A healthy relationship with money is more important than a healthy income.”
What Is a Social Class?
Social class in the United States generally refers to at least three groups of Americans based on their economic status: the upper class, the middle class, and the American poor or lower class. Some would argue that it can also relate to a person’s location or social status, such as a person’s level of education or occupation.
There is also debate about how many groups there are. For instance, some differentiate between the upper middle class and the lower middle class, and some differentiate the working class from the lower class.
According to the Pew Research Center, roughly 19% of Americans are upper-income households. Members of the upper class command considerable political, economic, and financial influence.
The middle class comprises people whose incomes fall within the median range for their geographic area. It’s the largest of three groups in the U.S., comprising about 51% of the households. But lower-income households, or those who fall below that median range, make up about 30%.
How Does Your Net Worth Compare with Others in Your Class?
Once you know your net worth, you can compare it with others to see how you stack up financially with your peers.
In 2021 (the most recent Pew Research Center data available), lower-income households had a median net worth of $24,500, middle-income households had a median net worth of $204,100, and upper-income households had a median net worth of $803,400.
The Federal Reserve also offers its breakdown of net worth by class. In 2022 (the most recent Fed data available), lower-income households had a median net worth of $93,300, middle-income households had a median net worth of $356,300, and upper-income households had a median net worth of $1,036,200.
| U.S. Household Median Net Worth | ||
|---|---|---|
| Pew Research Center Data | Federal Reserve Data | |
| Low income | $24,500 | $93,300 |
| Middle income | $204,100 | $356,300 |
| Upper income | $803,400 | $1,036,200 |
How does your net worth compare? Are you higher or lower than the median net worth for your class?
How You Can Improve Your Net Worth
If you are unhappy with your current net worth, there are steps you can take to improve it.
“Since there are only two broad components to net worth (assets and liabilities), you can improve your net worth by increasing assets and reducing liabilities,” Huebner says.
A big first step is controlling spending.
“Controlling spending is the most effective way to increase net worth. More income and assets are not as helpful when there’s a spending hole at the bottom of your net worth bucket,” Huebner says.
To improve net worth, you also want to improve your savings habits, ditch credit card debt, and increase your income.
“Save diligently by consistently contributing to retirement accounts, especially an employer-sponsored plan with a match,” Huebner says. “Reduce high-interest debt such as credit cards and personal loans. Increase income through career growth, starting a business, or passive income streams.”
The Bottom Line
Your net worth is a key measure of your financial health, and is one way to compare your financial standing with your peers. Calculating net worth is easy. Just subtract your total liabilities from your total assets.
Checking your net worth over time can help you see whether your finances are growing or declining. You can improve net worth by tamping down on spending, paying down debt, improving savings, and increasing income. So get in the habit of checking net worth and tracking it over time. You’ll get a clear picture of your financial standing with each net worth you calculate.
