Net Worth: The Only Score That Includes Debt
Net worth is the total of what you own minus the total of what you owe. It is the only common financial measure that counts debt, which makes it the one figure that cannot be improved by moving money between accounts.
How it works
Add up everything you own. Subtract everything you owe. That is the whole calculation.
Assets are cash, savings, investment and retirement accounts, property, and anything else with a resale value worth counting. Liabilities are mortgages, loans, card balances and anything else that has to be repaid.
What makes it different from every other figure people track is the subtraction. An account balance can rise while net worth falls, if the rise was financed. That cannot happen here.
Tracked once a month, it takes a few minutes and it is the only number that cannot be improved by moving money between accounts.
Why paying debt counts as much as saving
A dollar added to savings raises net worth by a dollar. A dollar removed from a card raises it by a dollar. They are arithmetically identical, and only one of them feels like progress.
That equivalence is the most useful thing this measure does. It settles the question of whether “paying down debt counts” — it counts exactly the same, and on a high-rate card it also removes a future cost, which saving does not.
The slope is the informative part. The level largely reflects age, income and how long someone has been at it. The direction and steepness of the line reflect what is happening now, which is the only part anyone can act on.
In practice: reading it honestly
A home is an asset and it is not a spendable one. Counting it is correct; treating the total as available money is not, because selling it means needing somewhere else to live.
So track two figures, not one. Total net worth, and the liquid portion — cash and investments that could be sold within a few days. Two households with identical totals can be in completely different positions if one of them holds almost all of it in property.
And read it in real terms occasionally. At 3% inflation, a decade of progress is worth about a quarter less than the nominal line suggests. That is not a reason to stop tracking the nominal figure — it is a reason to check the real one before concluding anything about a long stretch.
Month to month it is noise. A market move, a large purchase or an annual bill will swamp a month’s saving. Year over year is where the signal is, and comparing a month to the month before it is the fastest way to draw a wrong conclusion.
Valuing the awkward items is a judgement call, so make it a consistent one. Cars, jewellery and anything else without a clear market price should either be counted conservatively every time or left out every time. Changing the method is how a flat year turns into an apparent good one.
What net worth is not
It is not income. A high earner with high spending can have a lower net worth than a modest earner who has been saving for a decade, and the second position is the stronger one.
It is not a ranking. Comparing it to somebody else’s is comparing two different ages, incomes, countries and cost bases. The only useful comparison is with your own figure last year.
It is not spendable. Most of it is usually tied up in things being used or things that cannot be sold quickly, which is what the liquid figure exists to make visible.
And it is not a plan. It measures where you are. Budgeting is what moves it, and financial independence is the page about what number would be enough.
When it fails
The characteristic failure is a rising total with no accessible money in it. Equity in a home and a locked retirement account are both real, and neither pays for a boiler in March.
The second failure is the comparison. Published averages and medians blend ages, countries and household sizes into a figure that describes nobody, and reading yours against it produces either false comfort or false alarm.
A third is inflating the asset side. Counting a car at what it cost, a home at what a neighbour listed for, or a collection at what it is insured for makes the number rise without anything happening.
And a fourth is stopping when it falls. A market decline lowers it through no action of yours, and the correct response is usually to keep contributing — which is precisely the response that feels worst at the time.
A fifth is confusing a good year with a good decision. A rising market lifts the figure regardless of what was done during the year, and a falling one lowers it the same way. Separating what you contributed from what the market did is the only way to tell which of the two produced the line, and it takes one extra column.
The way to make this useful takes about ten minutes a month. List the accounts, list the debts, subtract, and write the date next to it. Keep the same valuation method every time, keep a second column for the liquid portion, and look at the twelve-month change rather than the last one. That is the entire practice, and its value comes from being boring enough to still be running in five years.
The original data
2 of the 24,971 videos measured for this site cover net worth, at a median of 1,057 views — a very small supply and a low median for a figure that underlies every other personal-finance decision.
The figure this page borrows is the inflation one: at 3% a year, money retains 74% of its purchasing power over ten years. Applied to a net-worth line, that is the difference between a decade that looks good and a decade that was good, and it costs one extra column in a spreadsheet to know which you had.
Related
Budgeting is the mechanism that moves this number. Paying off debt is the half of it most people leave out. And financial independence is the target the line is usually pointed at.
I tracked account balances for years before I tracked net worth, and the switch was uncomfortable in a useful way. Balances had been going up. Net worth had been going up much more slowly, because I was quietly financing part of the increase.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.