Financial literacy and education - Net worth
What is it?
Your net worth is the financial value of everything you own.
It’s all your assets (anything you own), minus any liabilities (anything you owe). Your net worth can inform your financial planning, how close you are to some of your goals, and where you might have to make changes.
It is something we should all know, yet tend to overlook.
As Business Insider’s Sarah Schmalbruch writes,
A negative net worth - when you’ve spent more than you’ve earned — can be the wake up call you need to make some serious financial adjustments.
A positive net worth - when you’ve earned more than you’ve spent — can be a confirmation that you’re doing well, and can help you plot out how much longer you need to reach your next financial goals.
How exactly do you determine your net worth?
Certified financial planner Sophia Bera provides a simple equation in her book, “What You Should Have Learned About Money, But Never Did”:
Your net worth = what you have - what you owe
Here’s the exact method she uses:
I have a spreadsheet that I pull up, I log into my accounts online, and I enter the balance of each of my retirement accounts, savings, investments, and so on. Then I enter any debts and subtract this number from my assets to determine my net worth.
If you own a home you can pull the approximate value of your house on Zillow.com, and then subtract your mortgage balance to determine how much home equity you have.
How often should you revisit your net worth? Twice a year, Bera suggests.
One’s net worth is often worth less than they think.
When someone says that their net worth is a million dollars or $100,000 dollars or whatever, we have to take that with a grain of salt. One of the main reasons net worth is not accurate is simply because the moment you begin selling your assets, you are taxed for any gains.
So many people have put themselves in deep financial trouble when they run short of income. To raise cash, they sell their assets. First, their personal assets can generally be sold for only a fraction of the value that is listed in their personal balance sheet. Or if there is a gain on the sale of the assets, they are taxed on the gain. So again, the government takes its share of the gain, thus reducing the amount available to help them out of debt.
Take accepted banking and accounting practices with a grain of salt
source: rich dad, poor dad
When we are filling out a credit application for a banker to buy a house or to buy a car, it is always interesting to look at the “net worth” section. It is interesting because of what accepted banking and accounting practices allow a person to count as assets. People that do not have a good financial position do weird things. They add their new golf clubs, art collection, books, stereo, television, Armani suits, wristwatches, shoes and other personal effects to boost the number in the asset column.
You may have too much investment real estate but still get turned down for loans. The loan committees don’t not like it when one makes so much money off of apartment houses. They want to know if one has “a normal job, with a salary”. Life is sometimes tough when one doesn’t fit the “standard” profile.
Tags
- 5 Money Rules That Will Increase Your Net Worth
- Net Worth That Defines Upper, Middle, and Lower Class
- What Your Net Worth Should Be By Every Age
Book recommendations
- What You Should Have Learned About Money, But Never Did, Certified financial planner Sophia Bera