net worth

Net Worth

Let's start by defining net worth. Your net worth is simply all your assets (cash, property, vehicles, jewelry, etc.) less any liabilities (such as mortgage or vehicle loans). Many of us did not grow up hearing the term net worth, nor was it taught in public schools. Instead we heard a lot about how much money a job paid or heard people talk about how much they earned. Now we generally hear the term being associated with wealthy individuals such as celebrities, CEOs and business owners. Contrary to what it may seem like on the surface, a high income does not directly translate into a high net worth nor does a lower income mean that you will necessarily have a low net worth.

So what should your net worth be? Many financial professionals use the following formula to calculate what a person's net worth should be:

Multiply your last year's gross earnings by your age and then divide that number by 10.

For example, if you earned $33,000 last year as a 24 year old, your net worth should be $79,200 ($33,000 x 24 = $792,000/10 = $79,200).

If you earned $90,000 last year as a 45 year old, your net worth should be $405,000 ($90,000 x 45 = $4,050,000/10 - $405,000).

The key to growing your net worth is to pay yourself first, keep your expenses in line, and have a solid investment portfolio. A general rule of thumb is to live off approximately 50% of your gross income. An example would be that taxes will consume about 25%, 15% should be put away into savings/investments, and 10% for charitable giving. The rest would be allocated to expenses such as housing, transportation, food, insurance, and entertainment. This is not a hard formula but gives a general outline of how to live off 50% of your income in order to increase your net worth.

If this is the first time you've ever been exposed to personal net worth, take action today! Start by calculating what your net worth should be along with what it is currently. If it is line, keep doing what you are doing. If it is not, take the necessary steps to get it in line for the sake of your own financial independence!