Have you ever taken the time to figure out your net worth? Most people haven’t, but it is an easy formula and often quite interesting. Your net worth is a snapshot into your current financial picture.
In order to calculate your personal net worth, you either want a calculator and paper or a spreadsheet program. Some budgeting software packages also have a net worth document.
Basically, your net worth is the comparison between your assets and liabilities. For an individual, your assets are the things you own. This could be anything from a possession like a house or car to bank accounts and investments. Liabilities are the debts you have. A simple comparison is the mortgage on your house vs. the value of your home. This equity is a part of your overall net worth.
To calculate your net worth, you simply add up the value of all your assets and subtract your liabilities. If you collect all your paperwork, bill and investment statements, as well a list of your current possessions, you could do the same analysis for yourself.
What is the significance of your net worth? The higher your net worth, the more stable your financial picture. It will help you evaluate whether you should borrow some to take a vacation for an example. It will also help you determine your security for things like emergencies and retirement.
How high should your net worth be? The main red flag with net worth is a negative number. If your calculation shows a negative number (your liabilities are higher than your assets), then it is time to look into credit counseling or debt management programs. Other than that, your net worth number will change with time and income.
The older you are, the higher the number should be. With time comes the accumulation of assets and paying down of debt. Also, the higher your income the more your net worth should be. If your net worth is not at least one year’s annual salary, you should be cautious about borrowing until your financial picture is more stable.
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