How High Is Your Score on the Most Important Measure of Wealth?

By Kentin Waits on 23 April 2015 1 comment

Net worth just might be the king of personal financial calculations and the most important scorecard in the game of wealth-building. By tallying total assets minus liabilities (or debts), your resulting net worth provides you with a quick and accurate snapshot of how you're doing financially. If you've never taken the time to understand and calculate your net worth, get started today. In the meantime, test your net worth IQ by answering these six questions.

1. Which of the following is considered an asset?

A. Your emergency fund.

B. Your used car.

C. The equity in your home.

D. The collection of rare coins you inherited from your grandfather.

E. All of the above.

The correct answer is E. All of these items are assets and contribute to a person's net worth.

2. Maggie pays her credit card balance in full each month. Her only debt is federal student loans. Should these loans be factored into her net worth calculations?

A. Yes. The balance of what she owes should be subtracted from her assets.

B. No. Student loans are considered "good debt" because they're an investment in Maggie's future earning potential.

C. Impossible to answer. Every person's situation is different.

The correct answer is A. Debt is debt and should always be part of accurate net worth calculations.

3. Adam is 26 and has a vested 401(k) balance of $32,000.00. Since he can't access these funds penalty-free before the age of 59.5, should they be considered part of his net worth?

A. Yes. The balance is still considered an asset regardless of when he can access it penalty-free.

B. No. When figuring his net worth, Adam should only include assets he could immediately access penalty-free.

C. Adam shouldn't include pre-tax assets in his net worth.

The correct answer is A. The value of a 401(k) is definitely considered an asset.

4. Leo has a whole life insurance policy. The policy pays $25,000.00 in the event of his death and has a current cash value of $900.00. Which figure should Leo use in his net worth calculation?

A. The full $25,000.00 value.

B. Only the cash value of $900.00.

C. Neither. Most life insurance policies are not considered assets.

The correct answer is B. Only the $900.00 cash value is Leo's asset. If the policy is in good standing upon his death, the $25,000.00 will be payable to his beneficiary.

5. Fill in the blank: Though there's no universal net worth target, many financial advisors suggest that a person's net worth should be ____ times his annual spending amount by age 72.

A. 10

B. 15

C. At least 20

The correct answer is C. With this approach, increasing age, income, spending, and saving targets keep pace with each other to ensure your net worth can maintain your lifestyle throughout retirement.

6. Aimee has more debt than assets. How can she overcome her negative net worth?

A. Increase her earnings and look for ways to save more money.

B. Repay her student loans as quickly as possible.

C. Actively increase the value of her home, while reducing her mortgage balance.

D. Actively avoid consumer debt.

E. All of the above.

The correct answer is E. Each of these approaches could help Aimee overcome her negative net worth.

That's it! Pencils down, please. Did any answer trip you up or surprise you?

Remember, as you begin to understand your net worth and track its growth, focus on the big picture. Monitoring things too closely is like getting on the scale every day when you're trying to lose weight — the information is skewed by dozens of temporary factors that provide almost no valuable insight.

Reviewing your net worth quarterly or biannually will give you much clearer picture. Look for upward trends and make sure that any debts you incur are investments that will help your net worth trend up in the mid and long-term (i.e., buying a house or pursuing a degree that will increase your earning potential).

Do you track your net worth regularly? What decisions, investments, or life events have boosted your net worth the most?

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Guest's picture
Donna Sako

The only criticism I have is the one about at age 72 having 20 times your annual spending amount. With pensions pretty much gone and social security and Medicare under attack plus the recession AND the uncertainty of the stock market, there is NO WAY the vast majority of the public can produce that target --unless they add a house, which may go down in value--not up, a car which means spending $25,0000 usually and goes down in value as you drive it off the lot, and the stuff you own which is probably actually worthless because you do not need half of it. If you are left with social security which averages $15,000 a year and have nothing else in income you must have a house, car and stuff which equals $300,000. Possible, but barely enough to live. So I guess they have to "sell" their homes to live. Which means added cost to their budget like rent which keeps going up! The deck is stacked against ANY secure retirement since 401k's have taken over, pensions dissolved, and now social security is under attack.

Guest's picture

Hey Kentin - I'd like to challenge you on a couple of things.

1. Net worth is the end-all be-all measurement of financial success.

Net worth is worthless if it is continuously depleted. Net worth is used to either reduce expenses (ie. no mortgage), or to create cash flow (investments that generate income). This income, or lack of expenses is the basis for financial success - namely, is your income more than your expenses.

2. An asset is anything that adds to your paper net worth -

Again, I respectfully disagree. An asset is anything that adds to your income, reduces, or in maturity will reduce your living expenses. It also must typically retain the majority of its value. Equity in your home, emergency fund (assuming you're at least trying to keep it up with inflation), and rare coins, sure.

A car is not one of them.

3. The rest of your stuff is spot on for the most part. The whole 20 x annual income at age 72 might be what many advisors recommend. But many advisors are really salesman in disguise so I'd have a hard time trusting their advice in the first place.

@Donna Sako - It's a hard world we live in. So how do we make it better (other then to quit trying to educate people about money the same way they did in the 60's. That's really worked out well for us hasn't it.....)