Net Worth: What It Is and Why It Matters

Net Worth: What It Is and Why It Matters

While many are more likely to use income as a measure of financial status, it is really a persons’ net worth that paints a more complete picture of their finances. Here is a guide to learn about net worth, what it is, why it matters, and how to calculate yours.

What is Your Net Worth?

Simply put, your net worth is the sum of all your assets minus your liabilities. A very simple example would be an individual with $10,000 in their savings account who owes $2,000 on their credit card. In this case, you would take the $10,000 (asset) minus $2,000 (liability) for a net worth of $8,000. 

How to Calculate Your Net Worth

Facing your true financial situation may be scary, but it is necessary to know where you stand so that you can make a plan moving forward. Knowing where you stand will also make you more conscious of future purchases and the liabilities you add to your situation.  Here is the method to calculate your net worth.

1. Calculate Your Assets

Generally, people only include items as assets if they hold a value of a thousand dollars or more, but you can include anything you think is relevant. Once you have your list of assets write down their approximate market value. After you determine the approximate value for each asset, add them together to find the value of all your assets.

2. Calculate Your Liabilities

Next, you must make a list of liabilities. Liabilities are anything you owe to someone else. Again, once you have your list you’ll need to write down the amount you owe for each liability. Then, add the amount for each liability to get your total liabilities.

3. Calculate the Difference Between Your Assets and Liabilities

To do so, you need to put the numbers you calculated into a simple formula. Assets – Liabilities = Net Worth It’s really important that you put the assets first in this formula so you get an accurate picture. 

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