Having a sense of what you own (your assets) and what you owe (your liabilities) is important because it provides some measure of your financial security and your ability to accomplish financial goals such as buying a home, starting a business, or retiring someday.
Calculate Your Net Worth
Your net worth is quite simply your financial assets (for example, bank and investment accounts) minus your financial liabilities (debts such as student loans and credit-card debt).
When I discuss your monetary net worth, I’m not talking about personal possessions. Your car, clothing, television, computer, and other personal items all have some value, of course. If you need to sell them, you could get something for them on Craigslist or eBay. But the reality is that you’re unlikely to accumulate personal items with the expectation of later selling them to finance such personal goals as buying a home, starting a business, retiring, and so forth. After all, these things are investments that decline rapidly in value after purchase and use.
Figuring What You Own: Financial Assets
To calculate your financial assets, access your bank statements and investment account statements, including retirement accounts and any other documentation that can help you. You may have only one or two accounts, and that’s fine. Add up all the values of these accounts to find out what you own.
It’s common for most young adults to be in the early stages of accumulating assets. In addition to excluding personal property and possessions because folks don’t generally sell those to accomplish their personal and financial goals, I would also probably exclude your home as an asset if you happen to own one. (You can include it if you expect to downsize or to rent in retirement and live off of some of your home’s equity.)
Determining What You Owe: Financial Liabilities
Most people accumulate debts and loans during periods in life when their expen- ditures exceed their income. I did that when I went through college. You may have student loans, an auto loan, and credit-card debts. Access any statements that document your loans and debts and figure out the grand total of what you owe.
Netting the Difference
After you total your financial assets and your financial liabilities, you can subtract the latter from the former to arrive at your net worth.
financial assests – financial liabilities = net worth
Don’t worry if you have a small or negative net worth (where you have more debt than assets). There’s no point wringing your hands over the results — you can’t change history. And, it doesn’t matter how you compare with your peers even if we can accurately define exactly who your peers are. This isn’t a competition or test.
But you can change the direction of your finances in the future and boost your net worth surprisingly fast to work toward accomplishing your personal goals.
Many thanks to Wiley for granting us permission to publish this excerpt. If you’re interested in reading an excerpt from another book of Eric Tyson’s, check out “Making Sense of Your Investing Options,” on our sibling blog Thousandaire.