Why Your Net Worth Is the Most Important Number You Aren’t Tracking

Most people know their salary, their monthly expenses, and maybe even how much they have in savings—but do you know your net worth? If not, it’s time to start paying attention. Your net worth is the ultimate measure of your financial health, showing you exactly where you stand.

Think of it as your financial scorecard: the difference between everything you own and everything you owe. A positive net worth means you’re ahead, while a negative one shows you’ve got some work to do.

Tracking your net worth isn’t just about getting a number, it’s about watching how that number changes over time, giving you a clear picture of whether you’re moving closer to your financial goals or further away.

What Your Net Worth Can Tell You

Your net worth can tell you many things. If the figure is negative, it means you owe more than you own. If the number is positive, you own more than you owe. For example, if your assets equal $200,000 and your liabilities are $100,000, you will have a positive net worth of $100,000 ($200,000 – $100,000 = $100,000). Conversely, if your assets equal $100,000 and your liabilities are $200,000, you will have a negative net worth of minus $100,000 ($100,000 – $200,000 = -$100,000). Negative net worth does not necessarily indicate that you are financially irresponsible; it just means that—right now—you have more liabilities than assets.

Since each person’s financial situation and goals are unique, it is difficult to establish a generic “ideal” net worth that applies to everyone. Instead, you will have to determine your ideal net worth—where you want to be in the near-term and long-term future. If you have no idea where to start, some people find the following formula helpful in determining a “target” net worth:

$\text{Target Net Worth} = \left[\text{Your Age} – 25\right]* \left[\frac{1}{5}*\text{Gross Annual Income}\right]$Target Net Worth=[Your Age−25]∗[51​∗Gross Annual Income]

For example, a 50-year-old with a gross annual income of $75,000 might aim for a net worth of $375,000 ([50 – 25 = 25] × [$75,000 ÷ 5 = $15,000]). This does not mean that all 50-year-olds should have this same net worth. The formula can be used simply as a starting point. Your ideal net worth may be much more or much less than the amount indicated by the guideline, depending on your lifestyle and goals.

Tracking Your Net Worth

When you see financial trends in black and white on your net worth statements, you are forced to confront the realities of where you stand financially. Reviewing your net worth statements over time can help you determine 1) where you are, and 2) how to get where you want to be. This can give you encouragement when you are heading in the right direction (i.e., reducing debt while increasing assets) and provide a wake-up call if you are not on track. Getting on track may include the following:

Spend Wisely

Knowing your net worth is important because it can help you identify areas where you spend too much money. Just because you can afford something doesn’t mean you have to buy it. To keep debt from accumulating unnecessarily, consider if something is a need or a want before you make a purchase. To reduce unnecessary spending and debt, your needs should represent the majority of spending. (Keep in mind that you can falsely rationalize a want as a need. That $500 pair of shoes does fulfill a need for footwear, but a less expensive pair may do just fine and keep you headed in the right financial direction).

Pay Down Debt

Reviewing your assets and liabilities can help you develop a plan for paying down debt. For instance, you might be earning 1% interest in a money market account while paying off credit card debt at 12% interest. You may find that using the cash to pay off the credit card debt makes sense in the long run. When in doubt, crunch the numbers to see if it makes financial sense to pay down a certain debt, taking into consideration the impact of no longer having access to that cash (which you might need for emergencies).

Save and Invest

Your net worth figures can motivate you to save and invest money. If your net worth statement shows that you are on track to meet your financial goals, it can encourage you to continue what you’re doing. Conversely, if your net worth indicates room for improvement (for example, over time you have dwindling assets and burgeoning liabilities), it can provide a needed spark of motivation to take a more aggressive approach to saving and investing your money.

The Bottom Line

Your net worth is the amount by which your assets exceed your liabilities—or, more simply, what you own vs. what you owe. Knowing your net worth can help you evaluate your current financial status and plan for the future.