Have you ever wondered how to gauge your financial well-being? If so, figuring your net worth is one way to accomplish this objective.
Net Worth Defined
Investopedia defines net worth as "the amount by which assets exceed liabilities." Your net worth is positively correlated with your financial health.
If the aggregate total of your credit card balances or other personal debts are substantially lower than the amount of assets at your disposal, you should be in decent financial shape. By contrast, if you are drowning in credit card, mortgage, or any other debt and struggling to make ends meet, there's a strong possibility your net worth is negative, and you are in dire financial straits.
Calculating Net Worth
To properly calculate your net worth, you will need to determine the total amount of your assets and reduce this number by your liabilities.
The sum of your assets can be calculated using the following:
- Residential property (market value)
- Vacation property (current value)
- Investment portfolio (i.e. market value of stocks, bonds, annuities)
- Savings accounts (including Certificates of Deposit)
- Retirement accounts (i.e. IRAs, 401(k)s)
- Automobiles (market value)
- Fine jewelry (market value)
- Antiques (market value)
- Fine art (market value)
- Other collectibles (market value)
Add up the following to determine your total liabilities:
- Credit card debt
- Student loan balance
- Personal loan balance
- Auto loan balance
- Home equity loan
The following scenarios illustrated different net worths calculated based on assets and liabilities.
|Elizabeth (recent college graduate)|| |
Savings account: $2,500
Auto loan: $4,500
|Tom and Elizabeth (newlyweds)|| |
Residential property: $185,00
|Marilyn (retired widow)|| |
Residential property: $250,000
|Home equity loan: $45,000||$783,000|
What This Means for You
In a nutshell, a positive net worth means that you would still be liquid, or have cash at your disposal, if you sell a portion or all your non-cash assets and use the funds to eliminate all your debt. By contrast, a negative net worth indicates you will still be in some sort of debt, even if you sell everything you own and use the proceeds, along with your current cash, to pay down outstanding debt balances.
Unfortunately, the latter is not that uncommon, especially for young adults who recently entered the real world or older individuals who generate a hefty sum of income, but carry hefty debt balances.
So should you sell everything you own and go on a starvation diet in an effort to boost your net worth? The choice is yours, but the wiser option is to eradicate consumer debt, which include items like payday loans and credit card debt, since they are often accompanied by exorbitant interest rates. At that point, you can work at focusing on the larger, long-term secured debts.
An Evoluving Figure
Finally, view your net worth as an evolving figure, which will improve over time as you make responsible financial decisions, such as funding your nest egg or paying off credit card balances.