Before you make any financial decisions, it’s always a good idea to first re-evaluate your net worth. This figure can help guide your decision-making and give you an idea of where you fall within a national context.
If you’re curious about how to calculate your net worth, allow us to help you get the answers you need to make better-informed choices about money.
What Is Your Net Worth?
At its most basic, net worth is defined as the amount by which your assets exceed your liabilities.
If you were to total all your available resources and subtract the amount of debt and other financial burdens you may bear, the resulting total is your net worth.
A cursory online search will turn up tons of net worth calculators designed to make it easy to decipher your lifestyle and arrive at your net worth. But, in the end, it boils down to how your assets compare to your liabilities.
While net worth is often applied to the business world, its role is no less important for your household. Knowing how much you — individually and collectively — are worth can be an eye-opening revelation that plays into your financial decisions and affects the amount of coverage you should have on your insurance policies.
Tracking this number over time can especially give you a good indication of your family’s financial status, as your net worth presents an objective, uncompromised look at your budget.
Assess Your Assets
While you may not give them much thought, chances are you have more assets to your name than you may realize. Perhaps the first assets you’ll think about are liquid assets — cash or an equivalent that can be converted to cash, as these can quickly be leveraged in the event of a financial emergency.
Any assets you have in checking or savings accounts, certificates of deposit, money market funds, etc. — would qualify. Stocks, bonds, retirement accounts and the like are also considered liquid assets for the same reason, though many consumers forget to include these because of the set-it-and-forget-it mindset often adopted with regard to this type of account.
When it comes to other non-liquid assets, things get a little more complicated. Although you can get funds from these resources, it takes more time to obtain their full value. Non-liquid assets include your primary residence and any other real estate properties you may own (typically, at their respective market values) as well as automobiles and other vehicles.
However, don’t forget to account for other high-value items, such as furniture, jewelry and collectibles, which can often contribute greatly to your accumulated assets. Because the value of non-liquid assets can shift dramatically, be sure to regularly take stock of your assets to ensure an accurate calculation of your net worth.
Looking at Liabilities
Now time to consider your liabilities. These factors are the ones you should be placing an effort on minimizing, since they directly limit the potential for you to boost your net worth year over year.
Statistically, what holds U.S. households back most is consumer debt. This encompasses non-mortgage debt such as credit cards, auto loans, personal loans and student loans, but still demonstrates a troubling trend.
The fact that consumers are falling so deep into debt is by far the top reason that net worth is so hard to build up, but of course, liabilities aren’t all bad. Strategic debt such as having a mortgage can often be a great way of building your credit and boosting your overall financial standing for the future.
Speaking of which, you’ll need to include any mortgages or other outstanding loans and debt into your net worth calculations. Real estate itself can be a strong investment, but take care not to overindulge in this regard, or you could be doing real damage to your net worth.
Once you know how to calculate your net worth, you can make wiser, more measured decisions about your finances. By knowing precisely where you stand, you get one step closer to a brighter future.
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