Definition: Your net worth is a summary of your personal wealth. It reflects the distinction between what you possess and what you owe.
What is Net Worth?
Your net worth shows the state of your finances. It indicates the difference between all of your assets (everything you own that has a monetary worth) and all of your responsibilities. (debts that you owe). For a calculation of net worth, add up all of your assets, such as cash, retirement accounts, and real estate, and remove all of your current financial liabilities. In the case of businesses, net worth is also known as financial value or equity. Monitoring your net worth over time will allow you to find out how your finances are progressing in general. It is preferable if your well-being improves over time.
What does your net worth include?
Both assets and liabilities are included in the net value. Stocks, savings account balances, a part in a business – all the monetary values you own – are examples of assets. Liabilities include college loan, vehicle loan, house loan, and credit card debt – everything you have to pay.
Your income is not directly considered while calculating net worth. Let’s suppose you make $50,000 per year in your full-time job. Salary is not an asset that is considered when evaluating net worth. However, there is a link between your earnings and your net worth: your financial statement documents your earnings and spending over a given time period. This covers your paycheck (along with any additional revenue) as well as your usual costs like food, rent, and mortgage payments. The remainder is your net profit or loss. (depending on whether you spent more or less than you earned). This profit or loss is included in your net worth.
What is included in your assets?
Assets that can be turned into cash quickly. They include cash on hand as well as funds in checking and savings accounts. Investments such as mutual funds, bonds, certificates of deposit (CDs), money market accounts, and equities are also included.
Assets include all retirement funds. So your 401(k), individual retirement funds (IRAs or Roth IRAs), and personal retirement savings are all included.
When determining your assets, include any property you own, whether it’s your primary place of living, a second home, a vacation house, or an investment property. You need to know how much your house is worth now, not how much you paid for it or what you believe it is worth.
You should also add valuable personal goods that may be resold on the list, such as an expensive automobile, jewelry, or pieces of art. Because such goods frequently have little resale value, you may wish to apply a cautious assessment.
Calculate the worth of all of your company’s stock. When evaluating net worth, take care to use the market value of your stake of the company rather than the financial value or accounting value. The market value is the amount you would receive if you sold your ownership in the firm right now.
What is included in your liabilities?
Every loan you have, including your house, student loans, and personal loans, is a liability. Instead of the sum you initially borrowed or could possibly due in the future, use the current outstanding balance (including any interest).
Your credit card debt is revolving; unlike a loan, which you can only borrow against once, you have a limit you can draw against several times as long as you return it. You should factor in the credit card balance when determining your net worth. Your net worth will differ when you recalculate it the following month because the balance fluctuates every month.
A liability is any outstanding debt. Other instances include unpaid medical bills, tax debt, unpaid child support or alimony, and judgments that have been rendered against you.