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How to Calculate Your Net Worth

Net worth is often used as a measure of someone’s financial success or maybe how well they inherited.  In its simplest form, net worth is your assets minus your liabilities, or what you owe.  Envision selling off your assets like homes, automobiles, boats, etc. and then paying off all loans and credit card balances outstanding, then add in your various financial accounts and the result is your net worth.  But what does it really mean?

We have two learning objectives for this post:

  1. To understand how to calculate your net worth
  2. Learn why “income producing” net worth may be more important than your overall worth

Net Worth – What is it good for?  Is an important question depending on your personality and overall financial situation.  From the standpoint of the human ego, having a high level of net worth may make us feel great, or vice versa.  In general, society has glorified financial success stories and held them up as people we should aspire to be like.  It isn’t possible for everyone to be a Warren Buffett, or Jimmy Buffett for that matter, both very financially successful individuals.

The old saying goes “I wish I was a millionaire”, which used to mean more than it does today.  Back around 1986, there were about 1 million millionaires in the U.S.  Today, there are more than 11 million about 34 years later.  Does this mean there are a lot more successful people today?  Not necessarily.  First, we have a much larger population.  Second, with inflation in wages and asset values, being a millionaire today doesn’t mean you are a wealthy as a millionaire in the 1980s because the cost of the goods we consume for our lifestyle cost more today.  A $1 million home in the 1980s would cost at least $2 - $3 million to replicate today, even more in some areas.

As I started to explain above, your net worth is calculated by subtracting the amount you owe on mortgages, loans and credit cards from the reasonable value of the assets you own.  For business owners, this may be a more complex calculation since it requires a valuation of the business to determine the worth.

But a high net worth doesn’t necessarily mean you are on easy street.  I like to think in terms of “income producing” net worth in situations where my clients depend on their net worth to sustain their lifestyle expenses, especially in retirement.  For example, if a couple retires living in a $2 million home with no mortgage, they would be considered a multi-millionaire.  But, if they have put everything they have into the home and are living off Social Security as their only income source in retirement, they will probably not have enough cash flow to put food on the table, take trips, pay their property taxes and the upkeep on the home.  So much for being a millionaire.

Contrast that to a couple who lives in a $400,000 home with no mortgage, has $1.6 million in investable assets and the same Social Security check and would also be considered a multi-millionaire.  This couple could reasonably expect to be able to have at least $60,000 of annual income from investments on top of their Social Security benefit.  In addition, the expense of upkeep and taxes on a more modest home will be far less than the first example.

In other words, net worth may not put food on the table unless that worth generates income in some way.  As you plan for your financial future in retirement, keep in mind the concept of income production from at least a part of your net worth.

Studies have shown that there are diminishing returns for happiness and lifestyle satisfaction as wealth grows past a certain point.  We want all of our clients to be financially successful, but the accumulation of dollars isn’t the only important thing in life.  Through our Waypoint FORMula planning process, we help our clients address both the aspects of financial success and the more important lifestyle and legacy goals.  Contact us today at (941) 778-1900 or visit www.integracapitaladvisors.com to schedule a time to talk about your planning needs.



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