What Is Net Worth?

Equity is the value of everything you own, that is, your financial and non-financial assets, minus your total outstanding liabilities (your debts).

Your net worth can act as an indicator of your financial health, and there are several ways to measure this useful metric.

What is the Net Worth?

Your net worth is essentially a grand total of all your assets minus your liabilities. In other words, your net worth is the value you get when you add everything you own, from the value of your home to the money in your bank account, and then subtract the value of all your debts from that value, which may include a mortgage, auto or student loans, or even credit card balances.

If you are wondering what your net worth is, know how to calculate and interpret it.

How does equity work?

Theoretically, your net worth is the cash value you would have if you sold everything you own and paid off all your debts. In some cases, this number is actually negative, indicating that you have more liabilities than assets.

While this is not an ideal situation, it is very common for people who have just finished college or are just starting their careers.

In this case, your net worth is also a measure of how much debt you would have left if you emptied your bank accounts and sold everything you have to borrow.

While neither is a realistic scenario, what your net worth measures is more important than the (generally unrealistic) assumptions you make to arrive at that number.

In fact, when it comes to your financial health, there is no ubiquitous net worth magic number that you should strive for. However, you should use your net worth to monitor your progress year after year and hopefully watch it improve and grow over time.

How to Calculate Your Net Worth

Calculating your net worth can be a simple process, but it requires you to collect all the information related to your current assets and liabilities. Most financial planners recommend that their clients keep a secure folder with information on all financial assets and liabilities that will be updated at least once a year.

Collecting and organizing this information can be a bit laborious at first, but it ensures that you (and anyone else who may need it, such as your spouse or financial advisor) have access to the information when needed.

While this portfolio can turn into so much more, calculating your net worth only requires basic financial information about the things you own and the debts you owe. Here's how to get started:

Calculate your assets

  1. Start by listing your greatest assets. For most people, they can include the value of your home, any real estate, or vehicles like cars or personal boats. In the case of an entrepreneur, this list would also include the value of their business, which has its own more complicated calculation. Be sure to use accurate estimates of current market dollar values.
  2. Next, you want to collect your latest statements for your most liquid assets. These assets include checking and savings accounts, cash, CDs, or other investments such as brokerage accounts or retirement accounts. Finally, consider listing other personal items that could be valuable.
  3. This can include valuable jewelry, coin collections, musical instruments, relics, or a collection of rare wines. You don't have to list everything, but you can try listing items that are worth $ 500 or more.
  4. Now, take all the assets listed in the first three steps and add them. This number represents your total assets.

Calculate your responsibilities

  1. Again, start with the major outstanding liabilities, such as your mortgage or auto loan balance. List these loans and their most current balances.
  2. Then list all of your personal responsibilities, such as the balance on your credit cards, student loans, or any other debt you may have.
  3. Now add up the balances of all the liabilities you listed above. This number represents your total liabilities.

Calculate your net worth

  1. To calculate your net worth, simply subtract your total liabilities from your total assets. For this exercise, it doesn't matter how big or small the number is. It does not necessarily matter if the number is negative. Your net worth is just a starting point to have something to compare in the future.
  2. Repeat this process at least once a year and compare it with the number from the previous year. By comparing the two, you can determine whether you are making progress or falling behind on your goals. You may want to recalculate your net worth more often if you have embarked on an aggressive savings or debt settlement plan.

More about equity

Be conservative with estimates, especially with home and vehicle values. Inflating the value of large assets may look good on paper, but it may not represent an accurate picture of your net worth. Consider using a budgeting app that automatically tracks your net worth.

Keep net savings in high-yield accounts, which can help them grow faster if you get a competitive annual percentage return. Work to pay off debt and consider refinancing or consolidating debt at a lower interest rate to help speed up debt repayment.

Review your budget to find areas where you can cut expenses and allocate more money for savings or debt repayment. If you have extra money to save, consider maximizing your emergency fund and then maximizing your annual contributions to an individual retirement account.

Enjoy Watching This Video About Budgeting

Source: Investor Trading Academy

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