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On money

There's value in calculating where your net worth stands

Personal Finance editor


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By HELEN HUNTLEY, Times Personal Finance Editor
© St. Petersburg Times
published September 14, 2003

What are you worth?
Click here for our NetWorth Calculator.

What's your net worth?

You don't have to be a millionaire to make it worth calculating, even if we most often hear the phrase in conjunction with names like Bill Gates or Warren Buffett, friends whose combined net worth is estimated to be north of $70-billion.

Net worth is the difference between what you own and what you owe. It is the single best measure of your family's financial well-being. Tracking net worth over time will tell you whether you are headed in the right or the wrong direction.

"We all need guideposts to see how we're doing, and that's a good one to look at," said Robin Delaney, a financial planner in Wesley Chapel. "It's certainly a lot healthier than looking at how many toys you've accumulated."

If you have never calculated your net worth, the result can be an eye-opener. The toughest part is gathering your financial information before you add up all the pluses and minuses.

"Sometimes people are pleasantly surprised at how much their net worth is," said Delaney, who runs Greenleaf Financial Strategies. "Sometimes they are shocked by what they don't have that they thought they had."

The reason net worth is such a valuable piece of information is that it brings together both sides of your personal balance sheet. Lots of people track the value of a 401(k) account, but focusing on a single asset tells only part of the story. It can even lead you astray if a rising balance prompts you to make early retirement plans without considering your burgeoning debt.

Some people have a negative net worth because they owe more than they own. That, of course, is a sign of big trouble.

But just how big should your net worth be?

One way to try to answer the question is to compare yourself with other people.

The typical U.S. household had a net worth of $86,100 in 2001, according to the Federal Reserve Board, which surveys consumer finances every three years. That number is the median, which means half the households had a higher net worth and half had a lower one. However, the stock market decline probably brought the median net worth down to $80,700 by the end of last year, the Fed said.

The most commonly held assets were checking and money market accounts, vehicles, homes and retirement plans. The most commonly held debts were mortgages and home equity debts, credit card balances and installment loans, such as car loans.

The wealth is not evenly distributed. Young people, renters, school dropouts, minorities and low-income families all have significantly less wealth than the average American. In 2001, the median net worth for households headed by someone under 35 was just $11,600. Median net worth peaked at $181,500 for households headed by someone 55 to 64.

Net worth, like income, is strongly correlated with education. Households headed by someone with a college degree had a median net worth of $213,300, more than triple that of households headed by high school graduates. The self-employed had the highest net worth, a median of $352,300.

But just having a typical net worth probably will not be good enough if you hope to put your kids through college and live off your investments during retirement.

Thomas Stanley, author of The Millionaire Next Door, offers his own formula for getting and staying on track as a "wealth accumulator." He says your net worth should at least be equal to your age multiplied by your pretax income, divided by 10, not counting any inheritance. That means if you earn $40,000 a year, you should have a net worth of $120,000 if you are 30 and $200,000 if you are 50.

Critics say the formula generates numbers that are too high for young people just starting careers and families and too low for older people approaching retirement.

So what's the alternative?

"Set your own standards and your own goals and achieve those," said St. Petersburg financial planner Robert Doyle of Spoor, Doyle & Associates. "Determine what you need to have for retirement and for college educations in the meantime. That's what you need to strive for. Ask "Am I on track or not?' That's the only benchmark you need."

The reality is that different people need different amounts of money. If you have a good pension, you can retire comfortably without a high net worth. But if you don't, and you want to be sure you won't run out of money too soon, you need at least $20,000 in assets for every $1,000 in annual income you hope to generate. (A pension is considered an income stream rather than an asset, so it does not show up on a net worth statement unless it is available as a lump sum.)

Calculating your net worth is one of the first steps in any financial planning process. You have to know where you are now before you can figure out what it will take to get where you want to go.

For families with modest savings, sitting down to add up the value of their assets and their debts has the potential to be a wake-up call.

"They might realize "I'm six weeks from being out of money and I don't have a reserve,' " Doyle said. "It might awaken a financial planning nerve deep inside somebody's body."

But whether you are on the brink of bankruptcy or comfortably wealthy, a net worth statement can be a planning tool, revealing areas that need attention.

"It's a helpful diagnostic tool for any individual," Tampa financial planner Laura Waller said. "We do it for our clients every time they come in."

Waller said she uses net worth statements for disaster planning:

"I think about the "what ifs' - what are the awful things that could happen to this family and how much do they have in liquid assets that could carry them."

In addition to calculating overall net worth, Waller and other planners want to know liquid net worth, which is what the family could readily turn to cash if the need arose. Generally it excludes both the market value of, and debts secured by, real estate and interests in private businesses.

Net worth also is an important consideration in deciding how much insurance to buy. The more assets, the more reason to buy an umbrella liability policy that will pay off once auto or homeowner's insurance limits have been exhausted.

"I want to make sure that if they had a car accident, there would be enough liability coverage to protect the assets they have," Waller said.

Preparing a net worth statement also is crucial for estate planning. To prepare an estate plan, you have to know who owns each asset and who is responsible for each debt.

A detailed net worth statement that lists assets individually offers a chance to assess lots of other things about your financial health, such as the size of your debt load, the quality of your assets and your debts, how well diversified you are and whether changes need to be made.

Tom DeMars, a property inspector who lives in Clearwater, said he tallies his net worth regularly because he wants to make sure his debt does not exceed 70 percent of his assets. He said he began adding up the numbers about eight years ago.

"I was forced to keep up with financial matters of my small business and I started to apply the same principles to our personal financial situation," he said.

Financial planner Doyle said he looks at his clients' net worth statements to pinpoint any overlapping assets.

"If you have a lot of equity in your house or you own rental properties, maybe you don't need any REITs (real estate investment trusts) in your portfolio," he said. Doyle said sometimes people think they are diversified because they have multiple accounts, but they own similar investments in each account.

Financial planner Delaney said she uses the net worth statement as an educational tool.

"I like to explain the difference between an asset that's going to work for them, such as rental real estate or a stock or bond investment that will generate income, as opposed to what they consider to be an asset, such as a Mercedes," she said. "Buying luxuries with borrowed money is not really improving their net worth. Most of the time it's actually decreasing it because of the expenses."

To improve your net worth, you can either direct more income to savings or to paying down debt. In the short term, your net worth will go up the same amount either way. Over the long-term, debt reduction is a better bet if the interest rate you are paying on the debt is higher than the return you could earn on the savings.

- Helen Huntley can be reached at or 727 893-8230.

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