What is your net worth? Quite simply, it’s what you have minus what you owe.
But your net worth doesn’t only refer to the cash in your checking account, your net worth looks at everything you own in addition to your cash, stocks, bonds, and other investments, including your home, plus furniture and furnishings, clothes and jewelry, cars, bicycles and even the train set your grandfather built 50 years ago.
It’s the sum total of the value of everything you own, minus what you owe.
And what might you owe? You might have schools loans, a car loan, a mortgage. You might also owe personal loans to friends or relatives. Spend more than you make? You might have credit card debt.
The reason you want to pinpoint your net worth is that it gives you a snapshot of your financial life today, which becomes a point of comparison down the road.
How much are you worth today? If you’re worth $100,000 today and in 10 years you’re worth $200,000, you’ll have seen your assets double in 10 years, for an average annual return of about 7 percent.
If you’re 30 and worth $100,000, and you continue to achieve a conservative 7 percent return on your money, at 40 you’ll be worth $200,000, at 50 you’ll be worth $400,000 and at 60 you’ll be worth $800,000.
Work another 10 years, and at 70 you could be worth $1.6 million. Increase that average annual return to 8 percent, and you’ll be worth a whole lot more at 70.
But we’re getting ahead of ourselves. Let’s start with some basic financial terms:
Assets are things you own. Cash, real estate jewelry, stocks, certificates of deposit, furniture, artwork, clothing, money market accounts, mutual funds, and other financial investments. Everything from your pots and pans to the sterling silver flatware your great-grandmother willed you.
Liquid assets are either held as cash or can be easily converted into cash. For example, a savings account is a very liquid asset. All you have to do is go down to the bank (or the ATM) and withdraw your money.
Semi-liquid investments are assets you can liquidate in a few days. Stocks and bonds are a good example of semi-liquid investments. You may take a hit because of the timing, but you’ll have your cash in three days.
Illiquid assets, which might also be called investment assets, may take some time (and may cost you some money) to convert into cash. For example, you may have $50,000 in equity in your house, but to get your cash out you’ll either have to take out a home equity loan or sell your home. That can take some time, and may cost you some cash. Other examples of illiquid assets include limited partnership and some mutual fund shares.
Personal assets refer to your personal belongings, such as furniture, artwork, jewelry, clothing, your car and a boat.
Liabilities are debts that you owe, including credit card debt, school and car loans, stocks you buy on margin accounts, money you owe to the IRS, and spousal or child support that you pay. Money you owe in your business (if self-employed) and items you purchased on credit or lay-away (like a television or a refrigerator or even furniture) are also liabilities.
Remember, your net worth is the sum total of your assets minus your liabilities. The easy way to calculate it is to add up everything you own in one column, and everything you owe in the other.
Hint: If you own a house, remember to write down the amount of cash you believe it would sell for if you listed it for sale today. In the “owe”column, you can put down your current mortgage balance. Your home equity is the difference between the current market value of your property and the current balance of your mortgage.