Your credit score and the size of your retirement portfolio are two factors you might use to check your financial status. But net worth is one thing that many people ignore. This article is all about your net worth.
Net Worth
Your net worth is the difference between the value of your assets, such as your home, car, 401(k), jewelry, or cash in the bank, and the value of your liabilities or what you owe. Understanding your net worth will help you spend your money more wisely. It also gives you a better idea of how far you are in achieving your goals.
The sum of a person’s assets minus their total liabilities is their net worth. So, net worth can be either positive or negative. For example, a person has a negative net worth if their debts exceed their assets combined.
Assets
The stuff you own makes up your assets. They are valuable items as well as those that may one day generate revenue.
Here are the details of the assets you can consider:
Market Value of your Property
Real estate’s current market worth entails the price of your house and any rental homes or other properties you may possess.
Market Value of Your Cars
All your vehicles, including cars, boats, motorcycles, and other things, are valued while calculating your net worth.
Value of your Precious Items
Take into account any jewellery, fine art, collectibles, and antiques you own.
Value of your Bank Accounts in Cash
Add up all the funds you have in savings and checking accounts. It also includes the certificate of deposit.
Value of your Investment Accounts
Your brokerage account balance, 401(k), and IRA are considered while calculating your net worth.
By looking on eBay, you can check the current market value of some of your assets, such as collectibles. You can use Edmunds or Kelley Blue Book to determine the current value of your vehicles.
Liabilities
Liabilities are what you owe to other people. These should be added up and taken out of your assets.
Here are the details:
Mortgages
The total amount you owe on all your property debts. It includes the mortgage on your permanent residence, home equity loans, and balances on any rental properties.
Medical Debt
Unpaid medical debts or a medical debt payment plan, even though interest is not being charged.
Personal Loans
Any loan you have from a bank, payday lender, internet lender, or other financial organization is a personal loan.
Vehicle Loans
Any debt you have for a car, boat, or other vehicle is a vehicle loan.
Credit Card Debt
Sum up the balances on your credit cards.
Student Loan
It includes all of your outstanding federal and private student loan debt.
Back Taxes and Liens
If you owe back taxes, have an IRS payment plan, or have a lien placed against any of your property, those sums need to be considered liabilities. Sometimes, the results of this computation show that you have more liabilities than assets. In this situation, your net worth is negative. To raise your net worth over zero, you should reduce debt and increase your savings.
A net worth calculator can assist you in including all pertinent assets and liabilities and perform the arithmetic on your behalf if you need a little help calculating your net worth.
Example of Net Worth
If a couple owns two automobiles for $15,000 apiece, a home worth $300,000, and $100,000 in checking, savings, and retirement accounts, their assets come to $430,000. (Let’s assume they don’t have any life insurance policies, expensive jewelry, furniture, or other illiquid assets.)
Suppose they owe $100,000 on their mortgage loan, $10,000 in auto loans, and $5,000 in credit card debt. Their total liabilities will be $115,000. As a result, their net worth is determined by deducting $115,000 from their total assets. So, the final answer would be $315,000.
Importance of Net Worth
Knowing your net worth is important crucial because it is a helpful indicator of your financial situation. When compared year to year, net worth can demonstrate if a person or business is improving their financial situation.
Once you have determined your net worth, you may create a strategy to raise it. You can do so by increasing your savings, reducing your debt, increasing your investments, or observing a growth in the value of an item, such as a home.
At first, a lot of information will need to be gathered to calculate your net worth. But if you keep it all in a safe location, it should be more straightforward in the future.
Types of Net Worth
A home, business, industry, or governmental body like a city, state, or nation can all have its net worth determined. The term “shareholder equity” is frequently used to refer to a company’s net
worth. It is the total value of the assets that shareholders will own after all debts and liabilities of the company have been settled.
For many of the same reasons individuals do, businesses and governmental entities routinely calculate their net worth to assess their financial status and determine what actions should be taken to improve finances and track progress in improving financial health. A continually profitable business will probably see steady growth in its net worth, frequently followed by an increase in its stock price.
Concisely speaking, your net worth is the sum of the value of all your assets, including financial and non-financial ones, less any debts you may have. Calculating the net worth at the end of every year is essential to plan future strategies.