We seem to have a fascination with the net worth of celebrities, but the wealthy aren’t the only ones whose net worth is of interest. It’s a good idea to know your own net worth so you can assess the state of your assets and liabilities and figure out how to increase your financial stability. Calculating your net worth doesn’t require an accounting degree. Let us walk you through it.
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Calculating Your Net Worth
Your net worth is equal to your assets minus your liabilities. That’s a fancy way of saying that your net worth is what you have minus what you owe. Your assets are things like the money in your checking account, savings account, IRA and 401(k). Your liabilities are things like what you owe on your mortgage, your student debt and your credit card debt.
You can start by adding up all your assets. Remember that these are things you already have, so don’t count your full annual salary if you won’t save all of your earnings, or count the full value of your home if you haven’t already paid it off. You can count your home equity, though. When you add up your debts, total everything you still owe with your current interest rates, even if you plan on refinancing in the future.
Then, simply subtracts your liabilities from your assets. It’s generally a good idea to include only the money you have now, which means inheritances you expect or life insurance policies for which you’re the beneficiary are off the table when you’re calculating your net worth.
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How to Interpret Your Net Worth
If your net worth is negative, don’t panic. Many people, especially those who have recently purchased a home, may have negative net worth. If you have a job and your debts are currently affordable, negative net worth may just be a means to an end and not a permanent state.
But if your current debts are unaffordable (including if you’re only making the minimum payments on your credit card debt) it may be time to reassess your finances and try to improve your net worth. You can do that by increasing your income (hello, side hustle) or decreasing what you owe by refinancing, balance transferring or otherwise negotiating more favorable loan terms.
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Your net worth will change throughout your life. If you’ve just bought a home and still owe 80% of the home’s value in a mortgage, you might have a negative net worth. If you’re near the end of your career and have paid off your home you’ll probably have a positive net worth, but remember that your money needs to last you for your entire retirement. The number you get when you calculate your net worth can’t tell you everything, whether it’s positive or negative. It’s up to you to take a holistic look at your finances and figure out how financial secure you are.
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