Finding Your Net Worth

Photo by: SLR Jester

What Is An Asset?

An asset is something that is owned by you.  Typically used, it would also need to have value.  I may have a wad of used chewing gum, but since I can’t turn it into cash very easily it’s not really much of an asset.  Sometimes intangible things are considered assets, like goodwill or trade secrets.  While you often can’t really sell these, they have value and are considered on your balance sheet.  All this may sound pretty complicated, but when it comes to personal finance, your assets can be summed up pretty quickly.  What do you own that’s worth something?  Those are your assets.

The biggest assets most people have are their home and their car.  They also, of course, include their cash and savings, as well as their stocks and retirement accounts.  Some things that many people forget to include:

• Cash Value Of Insurance Policies
• Jewelry
• Furniture and other household goods
• Timeshares or other partial ownership

An important thing to remember however, is that these assets are worth the amount for which you can sell them, not what you paid for them.

Liabilities

Liabilities are what you owe.  The most common liabilities are mortgages, car loans and credit cards.  Personal loans count as well, and many of us are still saddled with student loans.  Generally the value of liabilities are much easier to calculate than assets, as usually we have an outstanding account balance.

Net Worth

Once you’ve summed what everything you have is worth and removed the value of what you owe, you have your net worth.  Sadly for many Americans this value is less than zero.  For these people they’ve worked all their lives and have less to show for it than the day they were born.  One of the easiest ways to get into this circumstance is to purchase a depreciating asset on credit.  Every time you get a car loan you are purchasing–on credit–an item that will decrease in value.  Often during the course of ownership we are upside-down on our car, meaning we owe more than it’s worth.

The current economic crisis stems largely from a variety of people making similar purchasing decisions, but on a much more dramatic and large scale.  Homeowners, for example, rushed out and bought homes that they couldn’t afford under the premise that the homes would appreciate.  When they depreciated instead, these people were suddenly making interest-only payments on a house that wasn’t worth its original purchase price.  At the same time, banks were purchasing–on credit–Collateralized Debt Obligations and other confusing debt instruments that they didn’t understand.  When those turned out to be worth much less then anticipated, they found themselves in very similar circumstances.

The lesson is to not only monitor your net worth carefully, but to take into account which of your assets have realistic valuations.  House and stock prices fluctuate, and you should be amassing net worth outside any perceived increases in the value of these assets.  Ultimately you need to be saving in addition to purchasing.  Buying a house is not an investment strategy, it is a chance to fulfill a need for a place to live.  Recent history has certainly shown that housing prices do not always go up.  If the only saving you do is making your house payment, then your real net worth may not be changing, or it may even be changing to the negative.  Paying close attention to your net worth and its make-up is a key to a secure future.