There are important aspects of net worth, unfortunately, most finance literature focuses on only one of them, the components of the equation. Yes, it’s essential to understand what goes into the calculation of personal assets and liabilities, but what’s often left out of public and academic discussion is how to discover what your own ideal net worth is. It’s best to get a full understanding of the concept by examining three key components. The first two are familiar to most of us while the third is seldom discussed.

Assets

The most common definition of asset is anything of value that you own. No matter how large or small, if it has monetary value, it goes in this category. No two people have the same asset list or dollar amount of assets under their control. For average working folks, a typical list includes items like money held in cash, checking, and savings accounts, as well as equity in pensions, life insurance policies, job-based savings plans, profit-sharing programs, real estate holdings, retirement funds, personal property, and investments. It’s okay to include the value of things like coin collections, rare art that hangs on the walls of your home, and pricey jewelry as long as those items have resale value.

Liabilities

There’s no universal list of liabilities, but perhaps most of the population has most or all of the following on their tally sheet like credit card balances, taxes owed to any government entity, vehicle loans, a mortgage, dental/medical bills, home equity borrowing, personal loan obligations, student/education debt. Your own list might be longer or shorter than that, but the liability side includes anything you owe to someone else, to a government, or to a business entity of any kind.

A key part of this sub-category for many working adults includes student debt. Unfortunately, far too many people stumble through their professional years trying to juggle multiple education loans. The good news is that it just takes a few minutes of online research to locate lenders who can help you consolidate all your student loan agreements into one. That means one monthly payment, a single interest rate, and one set of terms. The even better part is that most adults have better credit scores after a few years on the job, thus giving them a better shot at lower interest rates on consolidations.

Your Ideal Number

When you do the simple math of subtracting liabilities from your grand total asset figure, then you arrive at your own value for net worth. It’s strange that so many people spend hours and hours crunching numbers to come up with their figure and then simply say that’s the value and you’re done, but what does your amount say about you, your finances, and whether you’re headed in the right direction or not? The answer is that it says a lot, if you know how to read it. To see if you are in the right ballpark, neither too high nor too low, take your age and multiply it by pre-tax income. Then, divide that number by 10. The figure you calculated earlier should be close to or above this formula result, namely (age x pre-tax income)/10.