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Exactly how wealthy are you? One way to measure your wealth and overall financial well-being is by calculating your net worth — the difference between your liabilities and assets.
According to the latest data from the Federal Reserve, the median net worth for American families was $192,700 in 2022. That's the equivalent of $211,229 today.
If you're in the half of the population with a net worth below that figure, it doesn't necessarily mean you're in a bad financial spot. However, if your net worth is negative, that could be a red flag.
Here’s why it’s important to increase your net worth, and what you can do if it’s currently negative.
Read more: This map highlights the average net worth in every state
What is net worth, and how can it be negative?
Your net worth is a figure that compares the value of your assets — that's any money or property that belongs to you — to the money you owe, including debt and overdue bills. Another way to think of net worth is that it's what you own minus what you owe.
It's certainly possible to have a negative net worth, since the amount you owe can indeed exceed the value of what you own. But whether or not it's a bad thing depends on the circumstances. While having a negative net worth is normal in some life stages, it can also be a sign of poor money management or other financial trouble.
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Alternatively, when you own more than you owe, you have a positive net worth. That means you have money available to save for emergencies, contribute to your retirement, or invest in other assets.
Is it ever OK to have a negative net worth?
In a very limited set of cases, having a negative net worth is not a red flag. In fact, it can be part of a solid financial plan if your debt represents an investment in your future.
For example, when you're in the early years of paying off a mortgage, your debt might exceed your total assets. However, your property can gain significant value over time. As your home grows in value and you pay off your mortgage, your net worth will grow.
Another example is taking on student loan debt. Your net worth will likely be negative while you're in school and even in your early career. But your education will ideally enable you to increase your earning power and your net worth in the future.
According to Federal Reserve data, the average net worth of college graduates is 382% higher than people who have only graduated from high school.
Read more: What is the average net worth by age?
How to turn your net worth from negative to positive
If your net worth is deep in the negative, it can take some serious effort to turn things around. As you work to improve your situation, remember that you might not flip to a positive net worth overnight, but any progress is important.
Here are some ways to increase your net worth when you're starting in the negative.
1. Pay off high-interest debt
High-interest debt — any debt with an APR of 7% or higher — is a recipe for negative net worth. Why? The interest you accrue will likely increase your debt at a faster pace than any investing returns can increase your assets.
If you have credit cards or other debt accounts with 8% APR or more, here are a few methods to consider for faster payoff:
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Consolidate: Use a debt consolidation loan or a 0% APR balance transfer credit card to pay off high-interest accounts. When you do, you can save money on interest charges and potentially pay off your debt sooner.
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Pay extra: Pay more than the minimum amount due each month. If you don't, your balance could grow faster than you're able to pay it down. To reduce your overall interest charges, try using the debt avalanche method, which entails paying extra toward the account with the highest interest rate first.
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Credit counseling: Get professional help from an NFCC-certified credit counselor. These counselors can meet with you for free to help you improve your debt payoff strategy or enroll you in a Debt Management Plan (DMP).
2. Shift your budget
Create more breathing room in your budget by cutting expenses and/or increasing your income. When you do, you'll free up extra cash to pay off debt and improve your net worth.
If you're ready to make big changes in your budget and accelerate the process, here are some changes to consider:
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Relocate to reduce your cost of living.
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Apply for a new job or a side gig.
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Rent out a spare room.
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Downsize to a smaller car or an older vehicle.
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Cancel all autopayments for non-necessities.
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Pick up overtime hours at work.
To find more expenses you can cut, look at your most recent credit card statements and bank statements. Check to see what non-necessities you're spending on and then take steps to cut them out. For example, you might need to start meal planning each week to avoid overspending on take-out, or you may need to cancel some subscriptions that aren’t used often enough to warrant the cost.
3. Move your cash
Where you put your cash matters. When you make sure your money is deposited or invested in the right place, it will grow faster and can even give you tax benefits.
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Emergency savings: Shop around for a bank account that pays competitive rates, such as a high-yield savings account (HYSA). Switching from a regular savings account to an HYSA can mean earning 4% or more on your deposits.
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Sinking funds: For sinking funds, or money you're saving for irregular — but planned — expenses, consider investing in a CD or Treasury bill. Both of these options pay you fixed rates of interest when you agree to leave your cash on deposit for a set timeframe, even if it's just for a few weeks.
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Retirement savings: Check to see if your employer offers a match on your retirement contributions. If they do, you'll get free money in your retirement account every time you make a contribution. Adding money to your employer-sponsored account is also likely to lower your taxable income.
