Your net worth can be described as the nominal quantity by which your total assets outweighs your liabilities. In other words, your net worth is the gap between what you currently own and what you currently owe (‘Currently’ shows that net worth is always changing with time). If your liabilities are lesser to your assets, you would have a positive net worth. The other way round, you would have a negative net worth if your liabilities outweigh your assets.
Your net worth serves as an instant illustration of your financial standing at that particular point in time. Try to calculate your net worth today, you will get the result of everything you have spent and all you have earned up till this moment. Moreover, this figure might be insightful, taking a regular track of your net value provides you a more acute view of your financial life.
On a periodic interval of calculation, one’s net worth can be seen as a financial report sheet. This helps you to assess your financial standing as that point in time. It can also give you the boost to figuring out the steps you need to smash your financial goals.
Assets can be described as anything you own that has economic value and can be liquidated into cash. Some of those items which can be termed as assets include retirement funds, investments, brokerage and bank accounts, real estate, cash and personal properties (cars, jewelry, etc).
Sometimes, intangible materials can also be considered as net worth, for example, one’s personal network. Meanwhile, liabilities can be described as anything that takes money away from you. Examples of liabilities include debts such as credit card debt, student loans, mortgages and medical bills. Your net worth is the total value of your assets minus your liabilities.
One big problem, out of others, in estimating net worth value is the task of assigning nominal value to all your assets. It is quite imperative to make decent estimates when attaching value on some assets so as to prevent inflating the final net worth value. For instance, your house is probably your most priced asset and can create a substantial effect on your financial overview. Calculating a correct value of your house, which can be effectively done by consulting a professional realtor, usually helps in calculating an accurate net worth.
More importantly, there are multiple arguments about whether personal homes should be labeled as assets when calculating net worth. Some finance professionals argued that the equity in your house and its market value should be put into consideration because the values can be liquidated in the event of a sale.
In opposition, however, some other group of experts opined that the owner of the house will likely spend the money in the rental or purchase of another house, even if he or she received cash from the sale of the house. In simpler terms, the cash gotten from the sale literally turns to a new liability (the cost of replacing the housing). Moreover, a portion of the former house’s value can be considered as asset, if the house sold carried more value in comparison to the replacement home.
Since it is easy to overhype the assets’ value, it’s more beneficial to drift towards the conservative side when attaching financial value.
What Does Net Worth Mean?
One’s net worth value can tell you a lot of things. If the value is positive, that mean you own more properties than you owe. A negative value mean you owe more than what you own. Let’s do a little illustration; assuming your assets is $500,000 and your liabilities are valued to be $200,000, that mean you have a positive net worth of $300,000 ($500,000 — $200,000 = $300,000). Similarly, if you have an asset value of $300,000 and your liabilities are valued at $500,000, you definitely have a negative net worth of $200,000 ($300,000 — $500,000 = -$200,000).
Nevertheless, it is worthy to note that a negative worth doesn’t equals to being financially irresponsible; it only implies that, at the moment, you owe more than what you own.
From time to time, one’s net worth will fluctuate, in the same manner like the stock market. Notwithstanding, what matters most is the overall trend, just like the stock market charts. All things being equal, your net worth value is bound to grow with respect to age increment (as you build equity in your house, accumulate more assets, clear off debts, etc). It is quite normal if your net worth starts waning, at some point in time, especially when you draw from savings and investments.
Why Your Net Worth Is Important
Most often, you will be be compelled to face the realities of your financial standing when you see trends in white and black on your net worth statements. A regular review of your net worth, with respect to time, will enable you to to know:
1. Where you are;
2. How to get to your desired destination.
This can give you a mental boost when you’re cruising towards the right direction (more assets, lesser debts) and can also signal you with a wake-up call if your financial overview is out of track. To get yourself back on track includes the following:
1. Spending wisely
2. Clearing off debts
3. Saving and investing.
Why Knowing Your Net Worth Is Important FAQs
What Is the Difference Between Net Income and Net Worth?
You will likely get some income if you own a business or work under someone else. The net income is what you have left after deducting taxes and other payroll subtractions e.g social security. Your total net worth which is the value of all your assets minus liabilities is different from net income.
How Often Should I Calculate My Net Worth?
There is no laid down rule or principle on the regularity of calculating net worth. It’s an individual thing. For some folks, a quarterly evaluation is ideal while some others want it yearly. However, financial experts recommended that you do the calculation again whenever you make a large sale or purchase (house or car).
What Does Liquid Net Worth Mean?
The liquid net worth can be described as the part of your total net worth that can be easily liquidated within a day if the need arises.