Personal Finances
(Continued)
Net worth is a measure of your financial health because it shows what you would have left over if you sold all of your assets to pay all of your debts. You can have a positive or negative net worth. Ideally, each financial move you make should increase your net worth (increasing assets and decreasing liabilities).
Step 1
Make a list of all of your assets and their estimated value. Remember that this includes retirement savings, current checking and savings account balances, stocks and bonds, and the estimated sales price for your home and your automobiles. Now add up those numbers and write it as your total value of assets.
Step 2
Make a list of all of your liabilities—your debts. This includes credit card balances, personal loans, student loans, and remaining balances on auto loans and your home loan. Now add up those numbers and write it as your total value of debt.
Step 3
Finally, subtract your total debt from your total assets. The resulting number is your net worth.
It’s important to put a date on this calculation so you can regularly return to it and update it. This will show you whether you are increasing or decreasing your net worth over time. Consider running this calculation at least once a quarter (every three months).
Negative net worth
Negative net worth occurs if your total debt is more than your total assets— if your credit card bills, utility bills, outstanding mortgage payments, auto loan bills, and student loans are more than the total value of your cash and investments.
Don’t panic if you calculate that you have a negative net worth! This could simply be because you are a young earner with high student loan debt and a starter income—you haven’t had the time or income to invest, yet. However, a negative net worth could mean you are overspending and overborrowing. If this is the case, creating a budget to limit spending, increase income, and pay off debt will serve you well.
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