How to Determine Net Worth

The net worth of an individual refers to the difference between the total amount of one’s assets less the total liabilities. The net worth concept helps persons evaluate their financial standing and progress.

Doing the required calculations is not difficult and it won’t take more than an hour of your time. To determine your net worth, you have to first find out the liquid value of your assets. Liquid assets are all financial resources that can be converted easily and quickly into cash. Such assets include money deposited in bank accounts, the cash value of your life insurance, and anything else that can bring quick cash. If you are unsure of the life insurance cash equivalent, it is best to ask your insurance company or agent.

If you are a homeowner, you might want to look at its current market value. You can do the same for pieces of furniture, jewelry, and your vehicle. In most cases, their current market value will be less than what you paid for an item. It is wise to be conservative when you do the math to find out the cash value of your possessions. If you have antiques and collectibles, each piece will have its value determined on an individual basis. Do not itemize absolutely everything but list pieces that are worth $500 or above.

Next, you have to determine the total value of your investments. Add the value of your bonds, saving accounts, individual retirement accounts, and other investment instruments as to determine your net worth. You should take the securities’ after-tax values in order to get realistic numbers.

As part of the calculations, you have to assess your liabilities. Add together all outstanding financial obligations such as automobile loans, lines of credit, credit card debt, student loans, payday loans, etc. You need to include all long-term obligations such as your mortgage. You may ask an agent about the current market value of your home or compare it to similar listings in order to get a realistic price.

Finally you have to calculate the difference by subtracting your added liabilities from your assets. This number stands for your net worth at the present moment. Even it you come up with a small or negative value, you have a starting point for comparison in the future. Basically, negative net worth means that you have less than what you own. You may think of changing your spending habits and lifestyle as to turn things around. Another way to increase your income is to invest in real estate and mutual funds. Wise investments may bring more money than your salary. At the same time, you should also focus on reducing the amount of your liabilities. Pay off high interest rate debt and proceed by paying your other financial obligations. It feels good to be debt free. You may also save money in an emergency fund, just in case that the market changes.

It is recommended to calculate your net worth once a year, comparing it to what you’ve got in previous years. In this way, you will be able to determine if you are getting behind or improving your financial situation.