How to calculate net worth and why you should do it
What's Your Net Worth?
by Peter Seeley
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The Forbes 400 List is the definitive ranking of the wealthiest people in the US by net worth. You might also read that celebrity so-and-so is worth several million dollars in net worth. But what does that mean? We took a closer look at defining net worth, calculating yours, and what all of it can teach you about your finances, assets, and the liabilities holding you back.
Simple Formula, Complex Implications
The formula for calculating net worth is simple, straightforward and not the kind of thing you need several degrees in financial planning to understand: Net Worth = Assets - Liabilities
Your net worth is defined by your assets minus your liabilities. That's simple enough. Now, take a piece of paper and make a list of your assets and liabilities as you see them.
An asset is anything you fully own or anything that is gaining you money, such as businesses, insurance policies, properties, money in the bank, your grandmother's antique furniture, and any investments you might have. A liability is anything that is costing you money instead, including a car you still have to make payments on for the next five or ten years, payday loans, a house you are still paying for, or credit card debt.
Take another look at your list and see if you could (or should) have arranged some of those things differently.
What Your Current Net Worth Says
Considering what you now know about assets and liabilities, you can grab a calculator and determine yours. Is the balance less than you thought? Is it coming up negative? Your current net worth should tell you where you are at right now. For most, and this includes people in top-management positions where you would seldom expect, their net worth comes up way less than they would be happy with or that they need to cover their costs now and retire comfortably later.
Getting to a Positive Net Worth
Your financial goal should be a positive net worth balance. This affects a lot of other formula's based around your finances like liquidity ratio or how much your assets can cover your liabilities in the case of bankruptcy.
- Put money away in a savings account first (even a small amount) and then pay your debts, accounts, and liabilities. While it sounds contradictory, you immediately have an asset now that you didn't have before, and you'll see that difference when you recalculate your net worth.
- Debt is a crippling liability, and in many cases can stand in the way of accruing assets. If you can avoid getting trapped in the debt cycle, do it; where you see an opportunity to work your way out, apply the same.
- Credit card debt is often resorted to when people need to get out of a bad situation or they think that they are using it to acquire an asset. Often the asset loses its value quickly and only increases liabilities.
- Invest. Many investments are geared at investors who don't have thousands of dollars to fork out. Consult with a financial adviser to make sure you find the investments that are best suited to you. Any investment continuously working for you is an asset.
- "How can I make more?" Nobody would be the first to complain that their money just isn't enough. Seize opportunity when you see it, and learn to create opportunity where there's a gap. Use your skills and find out how you can turn them into assets, too, by starting a small business, side-venture, or making occasional savings money from your hobbies.
- You want to own things instead of having to pay off these things. That's the simplest way of putting it. These things can be tangible hold-in-your-hands assets like cars or valuable paintings, or a deposit account with some money in it accruing interest.
- Liabilities can become assets. For example, by renting out your car for prom night (with chauffer and chaperone, of course!), you can put that money straight into paying for your car. Rent your garage as a band practice room per-hour. The ideas are truly endless if you put on your thinking cap and ask, "How can I turn this liability around?"
Calculator: What's My Net Worth?
Take the Next Step:
- If you haven't recently, calculate your net worth.
- Find out if you are heading for debt trouble. This simple checklist can help you determine if you are and point you in a better financial direction.
- Discover dozens of additional ways you can cut monthly costs and create a little more wiggle room in your budget with The Dollar Stretcher's Guide to Trimming the Budget and Cutting Expenses.
- Discover dozens of additional ways to make extra cash by visiting the Dollar Stretcher Library.
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