For the longest I had no idea what the term meant. Something about how much a net costs was my early thinking. I don’t know why I didn’t learn about it sooner.
Like my parents, I’m guilty of not teaching my kids about net worth and what it means. Now I know, and I’m going to spread the word.
Basically, to figure net worth you need to add up all your assets (Money and stuff you own), then subtract all your liabilities (All your debts). Upon doing so, you’ll have your net worth.
It’s possible to come up with a positive number, a negative number, or even zero. You really want to have a positive number, and the higher the better. If you end up with a zero, or negative net worth, then you’re not financially healthy and need to reduce your debt and increase your assets.
Let’s look at a simple example.
Shin, me, owns a house valued at $180,000.00, two vehicles valued at $3500.00 and $5600.00, and money assets of $100,000.00. Add all that up and my assets are worth $289,100.00.
Assets
House – $180,000.00
Vehicle 1 – $3500.00
Vehicle 2 – $5600.00
Money Assets – $100.000.00
Assets Total = $289,100.00
Now for the liabilities. Let’s say there’s still $160,000.00 owed on the house, both vehicles are paid for, as they’re hoopties and have been paid off for years. On top of that add a consumer loan of $6,000.00. Now adding all that up the liabilities come out to $166,600.00. Right?
Liabilities
Mortgage – $160,000.00
Consumer Loan – $6000.00
Liabilities Total = $166,000.00
Now to figure my fictional net worth we’ll subtract $166,600.00 from $289,100.00 with a result of $122,500.00. So, in that scenario my net worth is positive and not too shabby a value either.
Net Worth: $289,100.00 – $166,000.00 = $123,100.00
Those numbers are going to change over time. The mortgage will be paid down, as will the consumer loan. Money invested will go up, or it will go down, so the net worth will change. Hopefully the investments will go up. I expect the value of my house to rise as I do my market investments.
Of course, net worth can go down when one adds debt. Say we add a brand new car to the equation, financed at a loan of $29,873.00. That’s a new liability that must be added to the liabilities total. The car is valued at $29,873.00, so it should balance out, right? Nope. It doesn’t.
According to Edmonds.com the $29,873.00 car depreciates $2559.00 the minute it’s driven off the lot. Before the first payment is even made, the value is lower than the liability. That’s called being “Under Water” in vehicle ownership.
In that scenario, the assets side of the equation will be $2559.00 less than the liabilities. Not too bad if your net worth is up there, but if you have very few assets, then it’s not so good.
Let’s add that new car to the scenario above.
Assets
House – $180,000.00
Vehicle 1 – $3500.00
Vehicle 2 – $5600.00
Vehicle 3 – $27,314.00
Money Assets – $100.000.00
Assets Total = $316,414.00
Liabilities
Mortgage – $160,000.00
Consumer Loan – $6000.00
Vehicle 3 Loan – $29,873.00
Liabilities Total = $195,873.00
Net Worth: $316,414.00 – $195,873.00 = $120,541.00
Okay, so we’ve no figured the two scenarios and we’ve come up with the following:
Scenario #1 – Net Worth = $123,100.00
Scenario #2 – Net Worth = $120,541.00
Difference of Negative $2559.00
Buying the new car drops the net worth, simply because of the immediate depreciation. We haven’t even talked about the long term liability of the finance charges. Remember, you’re paying to use somebody else’s money.
We’ll talk about that more in the future.
So, now that you know how, go figure your net worth. I hope it comes out positive!
Good stuff Keith! I use Personal Capital to track my net worth, but I will be the first to admit that I rarely check. I am much more focused on my income right now. While I love seeing my net worth rise (who doesn’t?) I know when my income rises that it likely will continue to stay at that rate (or higher) over time, which is encouraging for someone in their late 20s! I also think it’s important for millennials to focus on income because the more you make, the more you can put towards debt, the more you can put towards investments (perhaps even some passive income investments like dividend-paying stocks), and continue to move forward towards financial freedom.
Thanks, DC! Personal Capital? Gonna have to check it out. I use a spreadsheet, manually entering everything. Our Net Worth fluctuates as the majority is in the market. Historically it will grow, so we don’t worry about it too much. I totally agree about increasing income. The more $$ coming in the more can be done with it. Sad thing though, most folks just spend it. Yep, we were guilty years ago.