Although the government measures wealth based on income, net worth is the proper metric for assessing wealth. But what is net worth, and how do you computer it? A net worth is not just something billionaires have. Everyone has a net worth, and we should all learn how to compute it.

Why Should I Know my Net Worth?

First, know that having a high income does not necessarily make a person rich. High income individuals are often on shakier financial ground than someone earning half as much, because they may spend all that they earn.

Living on less than you earn is the secret. Increasing income, reducing expenses, and investing for the long-term is how everyday people become everyday millionaires.

If you’ve ever applied for a mortgage or other loan, you know most banks have a statement of net worth to complete, right? We had to list all our holdings and debts.

More importantly you can track your progress on the journey to financial peace. We now include a metric on our spreadsheet called the wealth index. More on this later…

How to Compute Net Worth

Net worth is everything a person owns or possesses minus everything owed to creditors for those possessions. When someone is a millionaire, their net worth is a million dollars. They don’t necessarily have a million in their bank account.

According to the late Dr. Thomas J. Stanley, Ph.D., most people in their 50s (Generation X) should focus more on net worth than income. While it’s true that income is your biggest wealth-building tool, net worth is the measuring stick for how well we’ve done accumulating wealth.

On Thursday, I’ll share what Thomas J. Stanley shares in his book The Millionaire Next Door. I’ll tell you about the Wealth Index which helps identify whether you’re an Under Accumulator of Wealth (UAW), an Average Accumulator of Wealth (AAW), or a Prodigious Accumulator of Wealth (PAW).