Net worth is the total assets a person owns minus their overall liabilities. Here, assets include liquid assets (cash, cars, investment) and fixed assets (house) and liabilities include all the money that they owe to others or entity, including credit card balances and different types of loan.
How does it work?
To make it simpler, net worth is the value in cash that a person can get if they sell all their assets and pay off all their debts. It can be used to measure their financial status. For the ones who just leave college or start their career, their net worth can be negative. However, they should not be too worry and push themselves to work for a certain number. Instead, they should use net worth to measure their progress each year and see their improvement.
How to calculate your net worth?
Before you get started, you should gather all the information regarding your assets and liabilities and keep them in a secure folder. Make sure that you, your spouse or your financial advisor can access to the information if needed.
- Calculating your assets
To calculate the assets, you should first list all the largest assets, including your home, cars, and boats. If you have your own company, calculate its market values in current dollars. After this, you should calculate your liquid assets, including cash, your saving accounts, CSs and other investment. Finally, you should list all your personal items which worth more than $500, such as your jewelry, collection and musical instruments. When you finish, just add these together.
- Calculating your liabilities
To calculate the liabilities, you should list your mortgage or car loans first, then list your personal liabilities, such as credit card balance and student loans. After this, add these together.
- Calculate your net worth
It is so easy to calculate your net worth right now. All you need to do is to minus your total liabilities from your assets. You should calculate your net worth at least once a year and use this figure to track your progress.