When you’re trying to figure out how much money you’ll have in retirement, there are a lot of numbers thrown about that don’t make sense. People recommend saving up 20% of your pre-tax pay, but what the heck does “pre-tax pay” mean? What is a defined benefit plan? And if you work for someone else, how much do you actually contribute to their 401k?
This article breaks down what these terms mean and how they affect your net worth at an individual level. It also provides some general guidance on how to calculate networth before figuring out your personal plan for retirement.
When you’re trying to figure out how much money you’ll have in retirement, there are a lot of numbers thrown about that don’t make sense. People recommend saving up 20% of your pre-tax pay, but what the heck does “pre-tax pay” mean? What is a defined benefit plan? And if you work for someone else, how much do you actually contribute to their 401k?
This article breaks down what these terms mean and how they affect your net worth at an individual level. It also provides some general guidance on how to calculate networth before figuring out your personal plan for retirement.
What is net worth?
Net worth is the value of all your assets minus the value of your debts. Net worth is what you own after you subtract everything you owe from everything you own. Some people call it “assets minus liabilities,” but I find “net worth” to be a lot more intuitive. You can’t have a negative net worth, because that would just mean that you own more things than what they’re worth. A negative net worth would also likely mean that there’s something not right in your calculations, so it’s a safe metric to use in most circumstances.
Understanding what goes into net worth is important when designing your own retirement plan, because the goal is to maximize that number. Your net worth should be as high as it can be at any given time in your life. This article explains the ins and outs of calculating net worth, so you can make smart decisions about your assets and debts.
What is assets minus liabilities?
Assets are things you own that have value. They can be physical objects or they can be things like stocks and bonds and mutual funds that don’t take physical form but are still valuable enough to be desired by other people. Assets tend to appreciate over time, which means you’ll want more of them in order to maximize your net worth.
Liabilities are debts that are owed to other people. Liabilities are usually handled by companies and other organizations, but they can also be personal debt – you know, like credit cards and student loans. At a high level, liabilities lower your net worth because the amount of money you owe makes up for the value of the things you own. If you owe $10,000 in debt and have only $10,000 in assets, your net worth is zero.
When calculating net worth, it’s important to know how much everything is worth. Otherwise, you might end up with a negative net worth due to something called “debt service” (more on this later). If you have $10,000 in cash and a $10,000 car loan, your net worth is $0. If you had $20,000 in cash and liability-free investment accounts, then your net worth would be $20,000.
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