Why would you want to know your net worth? Your net worth is a snapshot of your financial standing today. It includes all your assets and liabilities, and helps you understand your financial health.
By knowing this important factor, you can make better financial decisions around what you buy and the debt you take on. Without knowing your net worth, you could financially hurt yourself by taking on too much debt and spending too much money. For some people, identifying their net worth can be a wake-up call if they realize their debts exceed their assets. Alternately, your net worth can be a confirmation that you’re soundly balancing your assets and liabilities.
Whichever side of the coin you’re on, calculating your net worth is a helpful tool across your financial life.
How do you calculate your net worth?
To know your net worth, you subtract your liabilities from your assets. The amount you have left is your net worth. For example, let’s say you have $355,000 in liabilities and $850,000 in assets. Your net worth would be $495,000 — meaning, you’re in the positive.
Or, let’s say you have $550,000 in debt and $355,000 in assets. Your net worth in this scenario would be –$195,000 — meaning, you’re in the negative.
What are liabilities?
Generally speaking, your liabilities are your debts, anything that you owe to somebody or something else. Your mortgage, car loan, student loans, these are your liabilities.
Another common liability is credit card debt. In today’s environment of rising interest rates, be careful with carrying credit card debt. You’ll end up paying more for your debt than you otherwise would in a lower-rate environment. So, to the best of your ability, pay down those credit cards now.
Also, be cautious about taking out loans for items like furniture and cars. These financial decisions are on assets that depreciate — meaning, they don’t grow in value — and you won’t get back the money you put out to buy them.
What are assets?
Your assets are what you have ownership in and has value. These are items like a house or property you own (with no loan), your 401k, investments, and other similar items. Even things like jewelry and artwork are assets. By compiling a true understanding of all your assets, you’ll gain a better picture of your financial value.
Remember: You can have depreciating assets, like cars, that don’t add much value to your finances, especially if you took out a loan to get them. And there are assets like family heirlooms, art, stamps, and coins that have a large range of value to others when sold on the open market.
The Takeaway
If you haven’t yet calculated your net worth, consider doing so today. By working with a professional to help you, you can create a realistic snapshot of your financial standing and know if you’re in the positive or negative. With this understanding, you can become more empowered in the financial decisions you make and how they will impact your life.
At Morse Wealth Management, we’re happy to help you understand your net worth. Contact us today to complete your financial picture.