Your personal net worth is calculated by taking your net assets and deducting your net liabilities. Lenders look at personal net worth along with credit history when considering whether to loan money to an individual. Even if you aren’t considering a loan you should know your personal net worth as it is the best indicator of your financial health.
What Are Net Assets?
Your net assets are anything that you own, from a pack of chewing gum to your home. It’s easiest to think of your net assets in three categories:
- Physical property: For most people their home or automobile(s) are their largest personal assets. Physical assets can also include collectibles and memorabilia such as a stamp or coin collection. A baseball signed by Babe Ruth or a rare Gibson Les Paul would also be considered an asset.
- Cash: Cash is probably the most obvious personal asset and the most common. Cash can be the money in your wallet or the money you have in the bank. Money is the easiest asset to tally as it requires no estimation to arrive at a value.
- Liquid assets: Anything from stocks to bonds to your company 401(k) contributes to your net assets. This can also include money owed to you by borrowers.
What Are Net Liabilities?
The short answer is that a liability is any debt or money owed. Any type of loan, such as a home or auto loan is a liability. If you owe your friend John $50 then that is a liability. Credit cards and other monthly payments also contribute to your net liabilities.
How to Calculate Net Worth
When you have many assets and liabilities calculating your net worth can seem complicated, but remember that the basic formula is only net assets minus net liabilities.
Let’s imagine you own a $100,000 home and a $20,000 car and have $10,000 in the bank. $100,000 $20,000 $10,000 = $130,000. You also have an $80,000 mortgage, a $10,000 auto loan and $5,000 in credit card debt. $80,000 $10,000 $5,000 = $95,000. To find your net worth you would take the total value of your assets and subtract the total value of your liabilities. $130,000 – $95,000 = $35,000.
Having a positive net worth, such as in this example, indicates you are healthy financially. A negative net worth shows that everything you own could not pay off your debts so you should develop a strategy to improve your net worth by gaining assets, reducing liabilities or both.