Do you know what your net worth is? Off the top of your head? It may come as a surprise to you, but it actually is an important thing to know — even if knowing that number is a much-needed reality check.
The importance of this knowledge is that it gives you a snapshot of your financial situation as it stands and allows you to see if you are actually making gains toward your goals. When you know your net worth, you can set a realistic financial goal.
Before delving any deeper into the subject, let’s take a look at exactly what “net worth” means.
Net worth is the amount by which assets exceed liabilities, or in simpler terms, it’s how much you own minus how much you owe. It is a concept applicable to individuals and businesses alike as a key measure of how much an entity is worth.
A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities. In the context of a business, net worth is also known as book value or shareholders' equity.
If you have more debts than assets, you have a negative net worth. For example, if you have a $15,000 student loan, a $10,000 retirement account, $2,000 in cash and $5,000 in credit card debt, your net worth is minus $8,000.
How did we arrive at that number? Assets are $10,000 in retirement plus $2.000 in cash, which equals $12,000 in the positive column. Student loans are $15,000 and credit card debt is $5,000, which amounts to $20,000 in the negative. $12,000 subtract $20,000 equals negative $8,000.
Depending on how financially active you are you could choose to review your net worth at short or longer intervals. Some people review their net worth monthly after they pay their bills and add to their savings. You can also review your net worth every quarter or on an annual basis.
You can discover your net worth by inputting all of your financial data on a spreadsheet, keeping your information private and off-line. Alternatively, there are safe and easy things you can do to track your net worth online. Typically, online calculators feature boxes that you type the value of various assets or debts into. You press "calculate" to find out your net worth. While you usually cannot save the results, you can take a screenshot of the calculator and save the image for your records. Compare the images from time to time to see how your net worth is changing for the better or worse.
Online Budgeting Programs often track net worth for you. This may be the simplest way to track your net worth, as the program does all the math for you. You grant the program access to your various accounts, such as your bank accounts, loans, and investment accounts. The budget program totals the amounts in each account or the amounts you owe to let you know your net worth from day-to-day. One drawback of using an online budgeting program is that you have to provide your passwords and personal information.
However, you decide to do it, keeping track of your net worth is an important step in staying on top of your personal finances.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.