In part two of the Building Your Wealth series with Darrin and Jayla, Darrin shares how you determine your net worth, why it is important that you know what it is and how to grow it. Darrin’s personal story sheds light on the importance to help family members ( in his case, his mom) protect their assets and implement ways to maintain a positive net worth.
What is net worth?
In a nutshell, your net worth is really everything you own of significance (your assets) minus what you owe in debts (your liabilities). Assets include cash and investments, your home and other real estate, cars or anything else of value you own. Liabilities are what you owe on those assets — including car loans, your mortgage, and student loan debt.
Net worth is a measure of your financial health because it basically says what you would have left over if you sold all of your assets to pay all of your debts. Every financial move you make should be aimed at increasing your net worth. This means either increasing assets, or decreasing liabilities.
How do you figure it out?
Here is the simple equation:
Assets – liabilities = net worth
Step 1: Make a list of all of your assets and their estimated value.
Step 2: Make a list of all of your debts.
Step 3: Subtract.
Here is an example:
Emma is 25 years old and rents an apartment. She has a newer car worth $20,000, but still owes $15,000 on it. Relatively new in her job, she only has $2,000 in her 401(k), and $1,000 in savings; she’s paying down $50,000 in student loans. And she’s racked up $5,000 in credit card debt as well.
Total assets: $23,000
Credit cards: $5,000
Auto loan: $15,000
Student loans: $50,000
Total debts: $70,000
EMMA’S NET WORTH: $23,000 – $70,000 = (-$47,000)
From The Simple Dollar.
What does a negative net worth mean?
Some people panic when they calculate their net worth and discover that it’s negative. This is usually the result of a young earner with a substantial amount of student loan debt and also a loan on a rapidly depreciating automobile. Why is your net worth negative? You simply haven’t earned or invested enough money yet to overcome the weight of the debt. Don’t worry, it will come.
However it can also be due to over-borrowing — for instance, if you’ve racked up huge credit card bills, and are not paying them down. This creates a large number in the liabilities column, with no valuable asset to offset it.