Net Worth

It's funny to think of people in terms of how much they are worth, but in finance, our monetary worth is calculated all the time.  A person's financial worth, or net worth, is a tool used in finance to determine the dangers or benefits a bank, credit card, or lending company may experience in lending a person money.  In personal finance, calculating and keeping track of your own net worth can help you get on track, stay on track or attain financial goals, so net worth becomes as important a tool for individuals as it is for financial institutions.

How is Net Worth Calculated?

 
Net worth is actually a simple calculation.  By listing your assets and liabilities, you can subtract the total of each to find your negative or positive net worth (typically calculates out to be negative in the beginning of your personal finance life and positive in the years to come).  Assets, as we remember from our Assets post, are the things you own that you can sell for a substantial amount of money, like your home, car, boat or jewelry.  Reviewing our liabilities post, we are reminded that liabilities are the amount of money we owe, or the amount of money we are in debt.

Show Me the Money

 
To go more in depth with a net worth calculation, let's look at an example.  John Smith is 25 years old, and he is just beginning his financial journey.  John has a 2007 Hyundai Accent worth $6,500, and he recently bought a cute bungalow for $100,000.  Recently, John married his college sweetheart, Joan, and he put a $5,000 wedding/engagement ring combo on her finger.  Joan brings a 2002 Dodge Durango worth $4,000 and a 1973 Harley Davidson motorcycle worth $3,500 to their combined assets.  Also, they have combined their savings accounts for a total of $10,000.  Adding all of their assets together, John and Joan's assets total $129,000. 

Moving on to liabilities, we see that John owns the Accent outright, owes $89,000 on the bungalow, and owes $4,500 for the rings, and Joan owns both her Durango and Harley outright.  John also had trouble with credit cards in recent years and owes $10,000, and Joan does not have credit cards but does owe $30,000 in school loans.  That means that John and Joan's liabilities total $133,500. 

Now for the fun (or painful) part: we can calculate the net worth.  If we subtract the liabilities from the assets, John and Joan's total net worth is...drumroll please... -$4,500.  I know, I know, that is very disappointing to a lot of young people first starting out.  They are worth a negative amount of money.  However, this is just the beginning, and as John and Joan continue their financial journey, they begin to gain job experience and financial knowledge needed to increase their wages, begin 401Ks, and sock away money toward their assets and their savings.  As their financial world becomes more stable, John and Joan will be positive about (and in) their net worth. 

When you calculate your own net worth, don't get too bogged down in a negative number, no matter how old you are.  If your net worth took a plunge in the recent market crash, for example, you always have time to re-assess your financial plan and begin diversifying your assets for a more stable financial status.           

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