What is your net worth?
Net worth is your assets - your liabilities.
Let me explain this a little more.
An asset is something you own that holds its value. This means simple things like your toothbrush or socks, although you own them, sadly are not assets. Assets would be more like a car, a house, or a fancy laptop. Assets can also be liquid or illiquid. Liquid means you could turn the asset into cash within a few days, like a savings account. Illiquid means it could take a long time to turn the asset into cash, like selling a home.
Liabilities are anything you owe or anything that takes money out of your pocket. Typically these are debts that you have to make payments on. They may be short term, like a credit card balance, or long term, like an auto loan. The important thing is to make sure that you are decreasing your liabilities over time.
Sometimes liabilities and assets go together. For example, you may have a car but also a car loan to pay for it. You are getting use out of the car and could sell it for cash, but you also owe someone else each month for the loan.
You also may not always know the exact value of an asset you own. You might have to have a professional give you a valuation for your items.
You can use some simple tools for calculating net worth, anything from an Excel sheet to a napkin. All you need to do is list all your assets on one side, list all your liabilities on one side, and find the difference. That difference is your net worth.
There are other resources, like Personal Capital, that can help do the calculations for you.
Depending on your stage in life, it’s okay for your net worth to be negative. This is only in situations where your debts will help pay themselves off, like student loans that will help you get a college degree.
Tip for the future. Buy assets that will bring in money for you, like rental properties.
1. Understand what your net worth is: Assets - Liabilities
2. Understand what assets and liabilities are: what you own vs. what you owe
3. Find your net worth once a year and make sure your net worth trends upwards over time.
“Money Tip of the Week”
Do your net worth statement when you do your taxes! This will make sure you do it around the same time each year.