Calculate Your Net Worth
A previous article discussed financial worth in the context of past, present and future earning power, and contributions to household savings. The following article will probe deeper into another component of worth - net worth.
The definition of net worth is the difference between assets and liabilities or the value of what you own versus what you owe. Net worth can be calculated on an individual or, on a joint basis (if you are married).
Assets come in a variety of forms:
- Monetary Assets, e.g. cash, savings, CD’s
- Investment Assets, e.g. stocks, bonds, mutual funds, retirement accounts
- Fixed or Tangible Assets: home, vacation property, car, fine arts
Liabilities or Debts come in two basic forms:
- Secured Debt, e.g. a mortgage which is attached to the value of your home
- Unsecured Debt, e.g. a personal loan, credit card, medical debt
And debt can be classified as either short-term (one year or less) or long term (greater than a year), installment (an initial amount is borrowed and monthly payments remain the same) or revolving (a line of credit has been approved but not all of the loan needs to be drawn at once and payments will fluctuate with the outstanding balance).
The values for your different types of individual and joint assets, and liabilities, at a specific point in time, are put together to form a Balance Sheet. The Balance Sheet gives a snapshot into your financial life revealing if you have more asset value than liabilities (positive net worth), or more debt than asset value (negative net worth).
Even though a Balance Sheet treats all assets the same in terms of having a positive value, there are differences in liquidity between asset classes. An asset like a money market fund is very “liquid” because it has a very specific market value every day which can easily be turned into cash. A boat is also an asset, however, in most cases it will decline in value over time due to depreciation and there isn’t always a close market of buyers and sellers, (meaning a small difference between the current bid and current offered price).
During the last 3 years, many personal balance sheets have done a big flip-flop. Asset values such as housing have taken a nose-dive while personal debt has risen.
A key to understanding your own financial situation is to recalculate your balance sheet quarterly. As asset and liability values shift you’ll be able to more clearly analyze your net worth and reset your goals accordingly.
(excerpts from Women Empowering Themselves: A Financial Survival Guide
by Hollis Colquhoun, CPFC, AFC and Antoinette Babek, CPFC, AFC)