Understanding Your Net Worth
Where You Might See Net Worth Used And What Does It Mean?
If you’ve read any financial books or used Quicken or some other financial software you’ve probably seen the Net Worth term before. Bill Gates’ net worth is apparently public knowledge based on the fact that money magazines publish estimates with annual regularity. Your Net Worth is an estimation of what your assets and liabilities add up to (or subtract down to in some cases). The problem with just looking at a net worth number is that its an estimate. The value of a house or a car may fluctuate (and in the case of many cars, they’ll go down over time unless you’ve got some sort of collectors vehicle). Your cash may be tied up into an IRA in some cases, which means you don’t have access to that without being penalized, so you may have a net worth that is $10,000 dollars due to equity in a home being outweighed by credit card debt, but you have access to only $2,000 in actual cash.
The concept of Net Worth also entails you needing to know about your assets and liabilities on a more intimate level than being able to say, “I have a house and a car and a boat and stocks and mutual funds.” You need to consider the cost of liquidating these assets as well [definition: liquidate means to turn from a physical object like a house into cash]. On the television show “Flip That House” they often show some very, very crude math at the end of each episode showing the flipper having made hundreds of thousands of dollars. Often after months of not selling the house the house sells for a lower price and the flipper is out months of mortgage payments, capital gains taxes as well as any real estate transaction fees. If the market is sliding in the area of the flip the value of the house could go down further. I’m not suggesting that all house flippers lose lots of money, but more that generalizations in net worth make the estimation farther from the truth of your actual asset value.
Calculating Your Net Worth
Make sure that you have a list of some of your valuables including any jewelry or high dollar collectibles and count all of your debts. Adding those values together will give you a general idea of what this looks like.
Example Lists
| Description | Value |
|---|---|
| House | $200,000.00 |
| Dodge Viper | $90,000.00 |
| Credit Card | -$20,000.00 |
| Savings | $2,000.00 |
If you look at the above pretend asset verses liabilities table you’ll notice that there are a lot of reasons to think this person is doing well, and they have a positive asset value, which is good. However, their longer term growth in value is more limited because they have very little that is likely to appreciate in value like an investment. The $2,000.00 doesn’t earn a large amount of money, even with a high yield savings account. This person is heavy in assets that won’t earn value like other things. The rist of a viper losing value is as far away as an accident. Evaluate your net worth and see where you stand.
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