What is Net Worth?

March 9, 2009

The most important measure of financial health is your net worth. So what is net worth?

Net worth provides an indication of where you stand financially. This is important for a number of reasons. Keeping an eye on your finances is necessary if you plan on buying a house, a car, or affording college for your children. Of course how well you do in retirement is directly impacted by your net worth when you plan on retiring.

Your net worth is a simple calculation of dollars and cents, addition and subtraction. It is a net number calculated by adding your financial assets (like savings, IRAs, your house value) and subtracting your liabilities (like loans, mortgages, credit card balances). To figure out both sides of the equation you will need to gather information about your assets and your liabilities.

How long it takes to gather the information depends on your organization. Assets include all items that you own including checking and savings accounts, stocks, bonds, mutual funds, valuables, and other investments. Anything that you own is an asset. It doesn’t have to be liquid (cash), just owned by you. The most recent documents and statements that you can find will give you the most accurate value of your assets.

On the other hand you have your liabilities. This includes any money that you owe someone else. Among other things it includes credit cards balances, property, home equity loans, car payments, and anything else that you do not own free and clear.

Make a list of both of these types of items. Even before you look for the documents, create a list that includes everything that you can think of. The more comprehensive your list, the better your estimate of value will be. Try this one to help jog that memory so you don’t miss anything.

Now that you have the items written down, it’s time to fill in the dollar amounts. You are hoping for the best, which would be a positive net worth, but the worst may not be as bad as you think. Calculating your net worth now gives you an idea of where you stand and what choices you have to make it better.

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