If you turn on the news from time to time, you’ve probably heard the phrase “net worth” thrown about, when talking about very wealthy people. Hearing about a billionaire having a net worth of 3 billion dollars or so might make you wonder “what is my net worth?” Your net worth is the difference between your liabilities, or debts, and your assets, or the things you own. Knowing what it is will help you see how you’re progressing on any financial goals you’ve set.
How Do You Calculate It?
Even if math isn’t your thing, finding the answer to “what is my net worth?” is pretty simple. Think of everything you own that has value. That includes your house, any cars and any bank and investment accounts, including your retirement accounts. Add up the value of those items. For example, you might own a house with a market value of 250,000 dollars, a car that’s worth 6,000 dollars and have 10,000 dollars in the bank. The value of your assets is 266,000 dollars.
Next, you want to figure out the same for your total liabilities. Let’s say you have a mortgage of 200,000 dollars on your house, still owe 2,000 dollars on your car loan and have credit card debt of 8,000 dollars. The total amount of your debts is 210,000 dollars.
To figure out your net worth, you subtract the amount of your debts, 210,000 dollars, from your total assets, 266,000 dollars. In this case, the net worth amount is positive, 56,000 dollars. That’s what you would have if you were to pay off your debts and sell all of your assets.
Keeping Track of It
Your net worth changes over time and can even change from day to day, based on a number of factors. Fluctuations in the market can cause the value of your home to dip or the amount in your retirement account to drop slightly, which can reduce your total assets. As you pay off your debts, your liabilities will decrease, boosting your net worth. If you take on more debt, your net worth will drop.
Just as you keep an eye on your budget, it can be helpful to keep an eye on your net worth. Take a few minutes to review your assets and liabilities each month to see how they are faring. Don’t panic if your net worth takes a dive one month, though. You want to look at the overall trajectory of it to get an idea of how you’re doing financially.
Why Does It Matter?
Figuring out your net worth is important because it gives you an idea of how you’re doing financially. Usually, net worth increases as you get older, accumulate more assets and pay down your debts. It’s fairly common for a person to have a negative net worth in his or her early 20s or 30s, as he or she might have recently graduated college with student loans and might not have much in the way of assets yet. Ideally, your net worth will creep into the black as you age and pay off your debts. If it doesn’t, it’s often a sign that you are living beyond your means or have more debt that you can handle.
The team at CESI is committed to helping you make better financial decisions and to helping you understand the ins and outs of finance and debt. If you want to get on top of your finances and increase your net worth, contact us today and find out how we can help.
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