Why this CFP says you're thinking about net worth wrong

When you think about net worth, you might automatically default to picturing celebrities and tech moguls and their million-dollar lifestyles. But everyone should take sometime to understand their net worth and how it relates to their everyday financial decisions.

Net worth is a basic principle of personal finance that everyone from new college grads to working families and even retirees can benefit from understanding. But, at the same time, it's crucial to take this number with a grain of salt.

The average American has $90,460 of debt, but the average net worth is $748,800. However, since the most affluent households skew the averages, economists agree that a better indicator of U.S. households' net worth is the median, which is $121,700.

Net worth is different than income. Calculate net worth by taking the total value of your assets (cash, property, etc.) and subtracting your liabilities (i.e. outstanding debt balances).

Mint financial planner Brittney Castro, CFP warns that many people think of net worth as an arbitrary judgment of how much money they should have by a certain age or a signal of someone’s wealth — but in reality, net worth is very nuanced.

Too often, we confuse our net worth with our self worth, argues Castro. But really, "it's important for people to look at it like a report card," she says.

Each individual has to decide for themselves how much money they need to save in order to live and/or retire comfortably. But, at the same time, our life circumstances can change — and sometimes dramatically — so it's best to think about net worth in terms of a momentary snapshot telling us how close we are to our goals. Then, you can put it out of mind while you get to the day-in-day-out work of budgeting, saving and spending mindfully.

Of course, staring your net worth in the face may be daunting, especially if you have student loans, a mortgage or other debts that loom large compared to your assets and cash in the bank. But it can also provide you with some clarity.

"It helps people think more with an entrepreneur mindset," says Castro. When you know where you stand, you'll then be more apt to consider ways to create better cash flow or add new income streams.

"That's the wealthy mentality," says Castro. "A lot of wealthy people follow the strategy of not taking on more liability unless it's connected to an asset or going to create more assets."

So how does the everyday person begin to embody this "wealthy mentality" and start growing their net worth? Ahead, Castro shares some of her best tips with Select.

While many people shy away from taking on debt, wealthy people borrow with long-term net-worth growth in mind.

"If you want to take on another mortgage or another liability, what can you do to create an income from that asset in order to cover it?" asks Castro.

One example is a Bay-area couple who, at the time they got married, had six-figure student loan debt and two mortgages. Though their student loans alone exceeded $150,000, they borrowed with the plan they would aggressively pay off the loans once they got jobs. They were able to make $4,000-per-month payments on the loans and still have enough leftover to cover their living costs.

While the couple also had two mortgages, they earned passive income by turning one home into a rental property. The tenants' rent covered the entire cost of the mortgage, which allowed the homeowners to build equity in a long-term asset that will appreciate in value.

The couple had a considerable amount of debt, but they also knew that debt was necessary in order to grow their net worth in the long term. They weren't struggling to pay off high-interest credit card debt, which doesn't ever offer any kind of return on investment.

Knowing your net worth can also help you make savings goals.

"You could say to yourself, 'if I saved $100 more per month, I could increase my savings by $1,200 for the year,'" Castro explains, giving an example of a simple place to start.

Eventually, you'll start to look for additional opportunities to bring in $150, $250 or even $500 more per month because you'll better understand how these short-term wins add to your lifelong financial wellbeing.

No matter how often you check your net worth, don't self-identify with it too much, Castro advises. At the end of the day, money comes and goes, and many factors are ultimately out of our control.

"Some people could have a net worth of a million dollars, then get divorced and half of it is gone," she tells Select. "Don't get so connected to your network that you start to tie in these comparisons of self worth."

Instead, think of net worth as a tool, kind of like a barometer. "Even if it is negative just say, 'Okay, well, what can I do to improve it?' Really, that's the idea," says Castro. "Then look for simple steps to improve it, even just cutting $50 a month from your expenses" can add up over time.

Net worth fluctuates, and that's normal. Budgeting and expense tracker apps can be instrumental in helping you monitor your net worth over time (without obsessing). Many apps give you the option to link all of your accounts, including checking, savings, money markets, CDs and retirement accounts, along with your liabilities such as credit card balances and student loans.

Empower (formerly Personal Capital) acts as an investment tool in addition to being a budgeting app, making it easy to see an overall view of all your personal finances in one place. Meanwhile, Mint is a good pick when you want to set and meet specific goals like saving up for an emergency fund and paying down debt.

For a total budget refresh, look into You Need A Budget (YNAB), which uses a zero-sum budgeting system that gives every dollar a purpose.

Budgeting, like net worth, may seem like a foreign concept, but with time it becomes as familiar as other daily habits like taking out the trash, doing dishes and making the bed — and you stand to benefit from the payoff for many years to come.