This isn’t going to be an existential analysis of how much a person’s life is worth. Instead, let’s take a look at how you can figure out what your net worth is. It’s good to know your net worth because it might be taken into consideration when you apply for a loan for a large sum of money, such as with a mortgage loan or a new business loan. Lenders aren’t just interested in how you have made payments in the past; they actually want to know what you’re worth before they’ll give you some money.
It may seem a little weird to reduce your entire existence into a mere number, and it can be truly bizarre to actually see the number once all the calculations are complete. Keep in mind it’s just a number that indicates how much your assets are worth, and really has nothing to do with you as a person.
It’s simple to figure out your net worth. The simplified version of the equation goes like this:
What you HAVE subtracted by what you OWE equals your net worth.
The trick to getting an accurate number is to carefully examine what you have and what you owe. Don’t just think to yourself, “Well, I have two thousand bucks in my savings account, so my net worth must be two thousand dollars.” There is much more to it than that.
What You Have
When you think about your assets, start with the money you have in your various accounts:
- Savings accounts
- Checking accounts
- Investment accounts
- Retirement accounts
Most people forget retirement accounts when they start cataloging their net worth, but you’ll want to include these amounts in your net worth. Any other accounts that you have that are worth money – whole life policies, annuities, etc – should also be included in the sum. Don’t include term life insurance policies because these don’t have cash value unless you die.
What other assets do you have?
- Objects of art
- Electronics and major appliances
You should think about how much money you would earn if you were to open the doors to your home and sell everything you own.
Cars and real estate are certainly considered assets too, but only after you subtract the money you owe on any loans associated with these items.
What You Owe
Take the amount of money you are worth after all your calculations of your assets, and then subtract everything you owe. Include all your debts, such as loans, credit cards, and the $500 you owe your parents.
You don’t have to subtract utility bills or any other recurring payments that aren’t consumer debt. For example, don’t write down your monthly electric bill as an item on the list of things you owe. Think of it in these terms: If you were to die right now, what would your estate be responsible for paying off?
Your Net Worth
Subtracting what you owe from what you have gives you your net worth. Should you panic if your amount is a negative number? It does not necessarily mean that you will receive a denial for your loan application, but it’s something to keep in mind that you might want to rectify.
If you do want to increase your net worth it’s usually better to pay your debt down as opposed to going out and getting more assets.
This is an article from Jonathan of masteryourcard.com. Check out Jonathan’s post on the Fair Debt Collection Practices Act.