Net worth isn't the big picture

It's easy to calculate your net worth, but what does the answer mean?

Determining your net worth is simple. Add all your assets such as savings accounts, a home, car, a 401(k) and other investment accounts, and valuable collections.

Subtract liabilities including a mortgage, car loans, student loans and credit-card debt. The remaining value — and ideally it's a positive number — is your net worth.

Some financial advisers offer this formula to learn what your net worth should be for your age:

Multiply your age by your pre-tax income then divide that number by 10. That answer is what your net worth should be to be considered wealthy.

For a 35-year-old earning $50,000 per year, the equation is 35 x 50,000/10 = $175,000.

Don't bother reaching for a calculator. Rachele Cawaring, owner of Cawaring Financial Planning in Bellevue, said net-worth formulas and comparisons are generally useless.

"When clients ask me how they're doing against their peers, they don't always like my answer, which is, 'It doesn't matter,' " she said. "What matters is creating the retirement income you'll need to live on."

Cawaring said the best way to know whether you're on track financially is to first figure out how much money you think you'll need to support your lifestyle at retirement. Next, look at your current net worth and ascertain how much you need to save each year to hit your retirement goal.

"Some people have a very modest net worth, but they're wealthy because they don't spend much. Others with relatively large portfolios are basically poor because they spend too much," Cawaring said. "Net worth is a snapshot. It doesn't show the big picture."