You may have heard about net worth statements in the past. For a lot of people, it conjures up an image of the rich and famous. The truth is, everyone has a net worth statement – even you. Tracking your net worth over time can help you to see your complete financial picture and ensure that you’re trending in the right direction.
What is Your Net Worth?
Your net worth is pretty simple to figure out, but to do that you need to get a full understanding of your financial life. It can be helpful to block out time, break out a pen and a piece of paper, and list out all your assets and debts to make sure you’re not missing anything. It’s easy to forget about a small debt that you’ve held since you were in residency, or the bonds your grandparents gave you for your birthday when you were a toddler (that you never cashed). No matter how big or small, jot everything down. Seeing everything in front of you at once clarifies what you’re currently dealing with.
It’s not always easy to see your net worth statement, especially if you’re a relatively new physician. The amount of debt you’re currently carrying is daunting, and the “debts” list is probably notably longer than your “assets” list.
How Do You Calculate Your Net Worth?
Now that you have a debts and assets list, you can calculate your net worth. Your total net worth can be calculated using the following equation:
Your Assets – Your Liabilities = Your Net Worth
Easy as that. If your net worth is negative, don’t stress yourself out too much about it right now. If you’ve been following the NewLeaf Financial Guidance blog for a while, you know that I’m not a fan of debt. I’m not in any way minimizing debt in your net worth statement right now. Debt is a colossal drain on your financial and emotional life, and over the next few years paying it down is going to be your #1 financial priority. But beating yourself up about it isn’t going to help anybody. Although you don’t want your net worth to stay negative, it’s more important to take the baseline right now, and move forward.
Why Is Your Net Worth Important?
Over the next several years, your net worth is going to go up and down. You’ll pay off student loan debts, sock some money away, buy a house, pay that off, continue to build your savings – and the cycle continues. The point is not to track your net worth obsessively. The point is to check in periodically to get an idea of the progress you’re making. The numbers don’t lie, so if you continually see your net worth sliding down, there’s a problem. If your net worth is slowly climbing, you’re doing something right.
Where Should You Stand?
There isn’t ever going to be a “right” number for your net worth. Your unique financial situation, goals, and values are all part of what makes up your “ideal” net worth. Still, it can be helpful to look at a kind of guide. You can use this equation as a pace car:
Net Worth = (Your Age – 25) x (Gross Annual Income / 5)
Keep in mind that if you use this equation and your net worth is lower than it should be, don’t sweat it too much. Instead, do the work to dig deeper and figure out why that’s the case. Are you carrying a monster amount of student loans? Is it time to pay off your credit card debt, or trade in your fancy new ride for something more affordable that you can pay off in full? Self-reflection when it comes to poor financial decisions is never going to be easy, but it is necessary if you want to improve.
With time, your net worth will start to go up. If you’re worried about whether or not you’re saving or investing enough to ensure that that happens, consider checking out my 10/20/30/40 budget. It’s a great way to get started on the right foot when it comes to charitable giving, growing your savings, paying down debt, and still having enough wiggle room to live your life.
Knock Out Your Liabilities
One sure-fire way to up your net worth number is to knock out a few of your liabilities. Putting together a debt hitlist and getting to work. I recommend starting your debt repayment journey in one of three ways:
- Paying off an emotional debt – the one that you feel the most negatively toward.
- Knocking out smaller debts first to free up cash flow to throw at your bigger debts.
- Paying down high-interest debts first to save yourself money in the long run.
Remember, if you’re a medical professional, you might qualify for PSLF – so don’t jump to consolidate or refinance your student loans just yet. Doing so might disqualify you and end up costing you a significant amount of money in the long run.
Calculating your net worth isn’t going to have an actual impact on your finances. What it does do is give you an idea of exactly where you stand, and what next steps you need to take to get where you want to be.