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Having a big house, flashy car and fancy electronics may make someone look rich, but after factoring in debt, his net worth might not be so impressive. Knowing your own net worth can help you figure out how you're doing financially, both at a specific point in time and as your net worth changes from year to year, help you plan your investment strategies better and figure out what you need to do to ensure a care-free retirement.
Net Worth Formula
Your net worth equals your total assets minus your total liabilities. For example, if all of your stuff is worth $550,000 but you owe $300,000 in debts, your net worth is only $250,000. Your net worth can also be negative when your assets total less than your liabilities. For example, if you have a mortgage worth more than your home and outstanding student loans from college and graduate school, it's not uncommon for your net worth to be in the red.
Your total assets include anything you own -- things like your house, car, furniture and electronics. When you're figuring the value, use the fair market value -- what you could get if you sold it. It also includes all your money, whether it's in a checking account, savings account, stocks, bonds, mutual funds and retirement accounts. For example, say you have a $300,000 house, $20,000 car, $10,000 in furniture, $50,000 in your various bank accounts and $170,000 in your retirement accounts: Your assets total $550,000.
Your total liabilities include all the money you owe, including loans and balances on your credit cards. Both secured loans, like your mortgage or car loan, and unsecured debts, like student or personal loans, count. Plus, if you have Uncle Sam claiming you owe more in back taxes, that counts, too. For example, say you owe $250,000 on your mortgage, $40,000 in student loans, $8,000 on your car loan and $2,000 on your credit cards. Your total liabilities equal $300,000.
Just because you have a significant net worth doesn't necessarily mean you have money to spend. Plus, even though you use the fair market value of your items to figure your net worth, you might have a hard time getting someone to pay that much or you might have to pay substantial fees for help making the sale. For example, you might have a $300,000 house, but it would take time to sell and you could lose a portion of that amount to taxes and commissions.
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