Your net worth is a snapshot of your financial situation.
To figure your net worth, or where you stand financially at any given time, you use a simple equation. Your assets, or what you own, minus your liabilities, or what you owe, equals your net worth.
If your assets outweigh your liabilities, you have a positive net worth. But if you have more liabilities than assets, you have a negative net worth. With a consistently negative net worth, you could get so deeply in debt that it would be difficult to pay off what you owe. If that's your situation, it's also extremely difficult, if not impossible, to begin to save to meet your financial goals.
CREATING A BALANCE SHEET
Figuring your net worth takes a little time. You'll need to gather your financial records — recent bank statements, credit card bills, and other documents — to have the numbers you need to create your own personal balance sheet.
If a lot of your assets are owned jointly, such as your home, you bank accounts, and your investment accounts, you and your spouse or partner can calculate net worth as a couple. Or, if you'd like to know where you stand as an individual, you can divide the value of those items in half. You can use the same technique for assets you hold in common, such as property you own with your siblings. But don't forget to include your share of the liabilities.
When you've finished the calculation, keep a copy of your net worth statement with your other financial papers. This will make it easier to update your records, something you'll want to do once a year or so as part of evaluating where you stand financially and the progress you're making toward your goals.
WHAT YOU OWN
Your assets include everything you own individually and your share of everything you own with other people.
Cash and cash equivalents. You add the balances in your checking, savings, and money market accounts, as well as in certificates of deposit (CDs), US Treasury bills, US savings bonds, and the cash value of your life insurance policies.
Investments. You include the market value of your stocks, bonds, mutual funds, exchange traded funds (ETFs), and other investments that you hold in taxable and tax-deferred accounts. Assets in your employer's retirement savings plans, in annuities, and in privately held businesses, including any you own yourself, are part of this category but investments made for other people, like 529 college savings plans, are not.
Real estate. If you own your home, it's an asset. So is any other real estate, including undeveloped land. Use the full amount of the estimated market value. You'll subtract your mortgage loan and any home equity loans under liabilities.
Personal property. Find the value of your cars, boats, fine art, jewelry, collectibles, and antiques. Remember that some assets, like antiques, may increase in value, or appreciate, over time while others, like cars, may decrease in value, or depreciate. You may want to have some of your more valuable items professionally appraised.
WHAT YOU OWE
Liabilities include everything you owe individually or with others.
Short-term debts. Your current bills and credit card charges are short-term debts, as are some personal loans. Include the current balances on your credit cards, even if you always pay the full amount that's due every month.
Long-term debts. This category includes the balance on any mortgage loans, home equity loans or lines of credit, education loans, car loans or lease payments, or any other liabilities you pay in installments over a period of years.
Other liabilities. You should include other amounts you owe, such as alimony payments, annual real estate taxes unless you pay them as part of your mortgage, personal debts, and liens against your property.
THE POWER OF YOUR WORTH
Potential lenders ask for a net worth statement when you apply for a loan. In fact, one reason to have a fairly up-to-date document on hand is that you'll have an easier time completing the application. They look closely at your current assets and liabilities, and they like to see that you have an investment portfolio. Although the assets in your employer's retirement plan are safe from creditors, you could tap the value of your taxable investments if you found yourself unable to repay a loan. You might also be able to borrow against the assets in your employer's plan.
Financial aid is based on your net worth, so if you have children who are or will be applying for college loans, you'll have to provide a full report of your assets and liabilities as part of your child's application.
Finally, if you want to make certain investments, including putting money into start-up companies, you may be required to have a minimum net worth, as demonstrated by the net worth statement you provide.
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