Ever wonder if you are on track financially for your age? Want to know if you are in a good financial position? Or are you in a bad one? The best way to find out is to calculate your net worth. Don’t be scared.
What is net worth?
Your net worth is your total assets less your total liabilities. Essentially, it’s everything that you own at the current day market value less everything that you owe to someone else.
Total Assets – Total Liabilities = Your Net Worth
Your net worth calculation acts as a snap shot of your financial health.
Let’s look at an example.
Jon Smith is 40 years old and makes $90,000/year.
| ASSETS | |
| Savings account | $5000 |
| RRSP | $56,000 |
| TFSA | $20,000 |
| Condominium | $400,000 |
| Art | $4000 |
| TOTAL ASSETS | $485,000 |
| LIABILITIES | |
| Home Equity Line of Credit | $20,000 |
| Mortgage | $200,000 |
| Car Loan | $15,000 |
| Credit Card | $3400 |
| TOTAL LIABILITY | $238,400 |
JON SMITH NET WORTH: $485,000 – $238,400 = $246,600
You may be wondering if Jon is on track with a net worth of $246,600. There are several different formulas out there to calculate a rough estimate of what a person’s net worth should be at any given age.
The old standard formula
Age X Annual Pre-Tax Income
10
If this was the case, Jon’s net worth should be $360,000. Here, he is below where he should be and would not be considered on track.
This formula; however, is dated. It doesn’t take the rising cost of post-secondary education into account, nor the fact that most people don’t start working until after their post-secondary education. In addition, most new workers enter the workforce saddled with student loans for years, making their net worth negative for a very long time after post-secondary education.
A newer formula captures this.
(Age – 27) X Annual Pre-Tax Income
5
This formula assumes that your net worth is likely $0 or negative if you’re under the age of 27, which is more realistic in today’s economy.
Using this formula, Jon Smith’s net worth should be appx $234,000. So, at $246,600, he is right on track.
Calculate your own net worth and see if you are financially on track.
Things to do to increase your net worth
- Make a budget. Don’t live outside of your means and take on additional debts as you age
- Make paying down debt a priority
- Automate your savings. Save like a bill, and don’t make it optional
Update: This story has been updated to correct a net worth formula that was omitted in editing.
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