Net worth is what you own that has value minus what you owe others. It is a snapshot of your financial situation at a moment in time. Net worth is an accounting term and it’s easy to figure out for a family or person. Hopefully, your net worth is on the plus side!
The formula is Net Worth = Assets (what you own) – Liabilities (what you owe).
Basically, if what you own is worth $100,000 and you owe $50,000, your net worth is $50,000.
Let’s take a closer look. Say you own your home and the home is currently valued at $500,000. And, you have a mortgage balance of $200,000. If you sold your home today for $500,000, and had no costs, you will receive $300,000 which you can deposit into your bank account.
Your net worth on this item is $300,000 even though your expenses might eat into this amount.
You probably have many other assets you own, for example a car or boat. Say your car is worth $10,000 and you have a car loan for $8,000. If you sold your car today and you received $10,000, you will pay the loan off for $8,000 and you can deposit the remaining $2,000 in your bank.
May be you have a few more things. Let’s say you have the following:
So, you can see that you have a net worth of $323,000.
Let’s look at another scenario where your home is worth less than you paid for it.
In this scenario, you are in the hole. You are overextended.
It’s useful to know the assets and liabilities and net worth for each spouse separately and jointly. It will help you with estate and financial planning. Attorneys and accountants will ask for this information.
Joint: Joint means you and your spouse own the asset or liability together. For example, you own your home together or your mortgage has both your names on it. If the mortgage is held by only one spouse, put this liability in the column for the person who is named on the mortgage agreement. You will also see this on your mortgage statement. Whether an asset or liability is held separately or together has implications in estate planning.
Accountants usually do a net worth statement slightly differently. They usually list assets first and then liabilities and then calculate the net worth. Also, they don’t typically take into account any major expenditures related to selling an asset. But, considering the sales costs related to an asset will provide you a better view of your financial condition.
Preparing to create a Net Worth Statement
You will need to gather up some information:
- All your latest account statements
- Bank Accounts
- Investment Accounts
- Retirement Accounts
- Personal, Student or other loans
- Life Insurance policy values
- Stock options or latest valuations
- Estimates of your possessions
- Other vehicles
- Estimates of your monthly payments
- Rent (if you pay rent)
- Any other recurring monthly expenses (estimates for food, clothing, etc.)
You can get estimates from many sources including Zillow.com or Realtor.com for your real estate properties, and Edmunds.com or kelleybluebook.com for vehicles. You may have to guesstimate the value of your Collections and Partnerships.
The traditional way is to list all and add your assets first, and then liabilities as below:
Cash and Cash Equivalents (anything that can be converted to cash immediately)
Real Property (Homes, Cars, Boats, Helicopters, Superduper Lawn Tractor)
Art and other Collections
Jewelry, Furs, Clothing, etc.
= TOTAL ASSETS
Credit card balances
Income taxes owed
Rent or maintenance payments
Outstanding bills (approx. monthly payment out)
Home Equity Loans
Life Insurance Policy or 401k Loans
= TOTAL LIABILITIES
After finding the value of your Total Assets and Total Liabilities you use the formula:
Total Assets + Total Liabilities = Net Worth
Do you like this article? Let me know your #1 takeaway in the comments section below.
Jasmine Alexander is the Founder and CEO of www.jazmine.com, an online organizer that safely stores personal records, account numbers, ownership documents and everything in between. Jasmine has a B.S. in Computer Science from New York University and a M.B.A. from UCLA Anderson School of Management.
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