How much are you worth? It’s a simple question, but one that not a lot of people can answer. It is important to know your net worth because it provides a valuable insight into where you are financially speaking. Understanding what your net worth is can also help you set future goals for savings, investment and ultimately retirement. That’s a lot of pressure to put on some numbers. Before you can calculate your net worth, you need to understand just what it means. Here’s how to start:
What Are Your Liquid Assets?
No, liquid assets aren’t the amount of soda cans you have in the fridge. Liquid assets are the amount of cash you can access quickly. That would be any amount you have in a checking or savings account. If you have an insurance policy that can be cashed out or short-term investments that allow you to pull out funds, these would be considered liquid assets as well. Another way to look at it would be how much money could you pack in a suitcase today?
What Are Your Investment Assets?
Your investment assets would be the money you currently have tied up in some form of investment portfolio that need to stay in that portfolio. Certain investments like stocks, bonds, mutual funds or retirement accounts often have a penalty attached if you withdraw the principle. You might have other investments such as gold, silver or other gems that would need to be sold before you can generate cash.
What Are Your Personal Assets?
Personal assets are a lot like investment assets. These are things that need to be sold in order for them to be considered of value. This would include your car, home, collectibles or another other property. What distinguishes personal assets from investments assets is that you didn’t necessarily acquire these items as an investment. They are just what you have to live your life.
What Are Your Short-Term Liabilities?
As the name implies, your short-term liabilities are the amount of debt you owe that you would typically pay off in a year. These include household bills like rent, phone, cable, utilities and property taxes. Your income tax owed and credit card balances would also fall under the short-term liability category.
What Are Your Long-Term Liabilities?
Your long-term liabilities are those ongoing debts that will take a lot longer to pay off. This is where things like a home mortgage, student loans or any type of investment loan would come into play.
Calculating Your Net Worth
Now it’s time for the math. The net worth formula is:
Assets – Liabilities = Net Worth
Seems pretty straightforward, right? There’s more.
Putting a Price on Assets
Coming up with that asset number requires you to assign a current market value to those items. Here’s another way to look at it: If you were to sell all your stuff on eBay, what could you get for the lot? For instance, you might have bought your car for $25K five years ago, but it certainly wouldn’t be worth that amount today. This is where the dreaded concept of depreciation rears its ugly head. The moment you take possession of something, it can go down in value.
Of course, with other things like property, those numbers could be higher based on current market values. When was the last time you had your home appraised? It might be worth going through that process so you can truly asses its value.
Adding up Your Liabilities
That same “current market value” rule applies when adding up your liabilities. It is the amount you owe today, not in the future. Yes, there could be additional interest payments on those loans, but that isn’t factored into the equation. If you won the lottery, what would you need to pay to wipe out your debts today? That is your liability number.
After working through all your records and making those calculations, you might discover your net worth isn’t what you thought it would be. That’s okay. It still serves as a solid benchmark of where you’re at today. Now you have your eyes set on a goal to increase that net worth. That’s a good thing.