Have you ever had anyone ask you where your net worth is? I highly doubt it, but it is an incredibly important question! First of all, what is net worth anyway? And why should you be concerned with what makes up your net worth number? These are great questions and will all be addressed in this post!
How to Calculate Your Net Worth
This term is often thrown around, but very few people can actually tell you what their net worth is. Basically, your net worth is the total value of everything you own minus the debts you need to pay. Here is an example to show you how to calculate your net worth:
- House – value of $175,000
- Car #1 – value of $20,000
- Car #2 – value of $10,000
- 401k – value of $20,000
- Total Assets = $225,000
- Mortgage – $160,000
- Car #1 – $15,000
- Student Loan – $25,000
- Total Debts = $200,000
Net Worth = Assets – Debts = $225,000 – $200,000 = $25,000
In the example above, the total assets minus the total debts left a net worth value of $25,000. Take a minute and calculate your net worth. It is a very important number to track regularly to make sure that you are continually increasing your value, rather than decreasing it as so many often do.
So…Where Is Your Net Worth?
Do have any idea where your net worth is? I know that might sound like an odd question, but it is actually quite important if you would like to see your net worth number rise. Let me explain.
In the net worth example above, the young couple had four major assets: their home, two cars, and a 401k account. Which of these assets is rising in value? Well, chances are that the house will rise in value over time and the 401k should also yield a positive gain as the years roll by. These assets are helping to increase the total net worth value. The two cars, however, are likely not. The $20,000 car will probably be worth about $10,000 in four years and the $10,000 car will plummet to $5,000 or so. Over the course of just four years, the auto values will take the overall net worth down by approximately $15,000.
Now, what if this couples’ net worth was split between a home, a growing business, real estate investments, a 401k, a high-yield savings account, and a couple of cars that were only valued at a total of $10,000? Would you say that this spread of assets would yield a higher net worth return in the future? I would say certainly yes!
Many people today have absolutely no idea what their net worth is, let alone where it is, which is really a shame. If people simply took the time to understand the nature of their purchases and their overall assets, they could really increase their net worth and quality of life by a much larger margin than what they are today. Instead of slaving away at their jobs for 40+ years of their lives, they could spend wisely and enjoy a life of travel and freedom. All while continuing to increase their net worth!
So…Where is My Net Worth?
It’s always good to be transparent, right? So you might be curious where my net worth is currently. After all, I’m the one sitting here on my sofa bossing you around about your net worth, so I should be leading by example right? Well, I am certainly trying. Without putting any numbers on my total assets or liabilities, here is my net worth layout:
- Car – 2001 Honda Civic
- Truck – 2001 GMC Sierra (currently selling)
- High Yield Checking/Savings
- Home Mortgage
The 2001 GMC Sierra is a truck that I bought for an amazing deal, drove around for a while, and now I’m trying to sell for more than I bought it for. And, my car is so old and has so many miles that it is no longer depreciating in value. I could still easily get $2,500 for it today, which is exactly what I bought it for two years ago. Finally, the home mortgage is nearly gone. I plan to pay off the remaining balance in the next couple of months, which is very exciting! The next step in growing my net worth is to by some real estate. Not only will the rental properties increase in value, but they will provide me with a monthly income from my renters.
So, I leave this question with you now: Where is your net worth??
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.