Understanding Net Worth—Your Financial Health at a Glance

Introduction: Your Net Worth is one of the most important indicators of your financial health and long-term financial success.

Simply put, it’s the difference between everything you own (your assets)—and everything you owe (your liabilities).

Assets represent what you own—like your savings, investments, your home, and any other property—while liabilities refer to what you owe, such as loans or credit card debt.

How can I calculate my Net Worth?

A quick example might be best:

Suppose you own a home worth $500,000 and your mortgage balance is $250,000. Your net worth from the property is $250,000 before factoring in taxes or transaction costs related to the sale.

You can then keep adding any other assets (checking account, savings, retirement savings, your car and so on) and subtracting any other debt too (credit cards, car loan, student loans) to get to your total Net Worth.

How can I increase my Net Worth?

Because your Net Worth has only two components—everything you own and everything you owe—you can increase it by reducing debt or increasing your assets. Or in most cases—both! Tobi’s Smart Cards^™ are designed to help you decide which way may be more impactful in your particular case.

However the biggest predictor of someone’s Net Worth is not so much their income, but rather their age. And not for the reason you may think!

It’s true that the older you are, the more time you have had to earn income, accumulate assets and pay down debt like mortgages. But most people actually end up spending most of what they earn as they get older, too. So what’s their secret?

The key to increasing your Net Worth lies in the power of compounded investment returns – a mathematical wonder that most people do not discover until they’re in their 30s or 40s – if ever. But the very few who deploy it earlier in life are the ones who reap the benefits.

Watch Tobi’s simple video explanation to learn how compound interest and investment returns can transform your wealth over time. It might change the way you think about your finances forever! [LINK TO TIME VIDEO]

What if I have a negative Net Worth?

If all your total debts are greater than all your assets, you’ll have a negative net worth. And that’s typical for most young people. And in many cases, a positive net worth can turn negative if you take out loans that are not immediately offset by an asset.

For most young people a sudden dip in net worth is due to taking out student loans. And that’s because the value of your education can never be reflected immediately in a diploma. Only in potential future earnings—which you could also think of as an asset that doesn’t show up in your net worth statement!

This is just one reason why focusing on the long-term projection—10 years or longer—is the more meaningful way to think about it.

How does my Net Worth compare to others in my age group?

Your desire for comparisons with others is understandable, and Tobi’s Smart Card^™ will display it. But I can guarantee you that there will always be someone who has more than you. So if you’re looking for comparisons, keep in mind that everyone’s financial path is unique—and in many cases hinges on your personal history and luck, too!

So while it may be true that age is the biggest predictor of Net Worth, so is the wealth of your family, your upbringing, your health, education, and too many other factors that you have no control over.

So don’t get discouraged—or overjoyed—by where you may fall in this comparison. While it can certainly be a helpful measure as a ballpark, the present is just a snapshot in time. So focus on what lies ahead instead. And on what would make you happy.

Why does asset liquidity matter so much?

All assets may have some value, but there’s another component that is also very important: the asset’s liquidity. While some are easy to access and use—like money in your bank—others take time, effort, or expenses to turn into cash. And the ease of converting any asset into cash is a measure of its liquidity.

That’s why Tobi's Card helps you categorize your assets into two buckets: liquid and illiquid.

Liquid Assets are Easy to Access

Liquid assets are the ones you can rely on in a pinch—like money in your checking or savings account or even investments in a brokerage account. They are easily converted into cash with little to no cost or delay.

Illiquid Assets are Valuable, But Less Flexible

On the flip side, illiquid assets are the things you own that hold value but aren’t easily sold for cash. Think of:

• ✔️ Real estate or rental properties
• ✔️ Retirement accounts (subject to potential penalties and taxes if accessed before age 59 1/2)
• ✔️ Cars, jewelry, art, llamas, or collectibles
• ✔️ Stock options or equity in businesses that are not publicly traded on a stock exchange

While illiquid assets can also be very valuable (except for llamas), they often come with transaction costs or lengthy sale processes.

For example, selling a home might incur about 8% in transaction fees and take time. And if you’re selling early or paying capital gains tax, the net proceeds will be lower.