What is Net Worth

Just realised the first thing I should explain is how do you work out your net worth. I have already given you the target formula out of the Millionaire Next Door but I did not confirm how you work out your current net worth.

Really your net worth is the value of all of your assets minus all of your liabilities or what you own minus what you owe.

The assets or things that you own should include cash, investments, pensions, your home and any other real estate. I would not include your car or any normal items around your house as these are not usually worth as much as you paid for them.
Your Liabilities or what you owe are made up of any type of loan, overdraft, mortgage, credit card debt or student loans.

Really working out your net worth is not particularly hard but it will take a bit of time to work out all your assets most of these you can get from your latest financial statements from how ever the asset is held by.

The same it true for all your liabilities these again should be available via you latest financial statement.

As an example you could have a house worth £250,000 and owe £200,000 on your mortgage, you could have a car loan for £5,000 with credit card balance of £500 and a cash savings of £2,000 along with a pension balance of £40,000.

We would then add all the assets together £250,000 + £2,000 + £40,000 =£292,000.

We would then add all of the liabilities together £200,000 + £5,000 + £500 = £205,500

Thus giving a total net worth of £292,000 – £205,000 = £86,500.

Let look at another example of a younger person with Student loan of £50,000 and credit card debt of £1,200 and cash savings of £2,000.

As you can see as this person is young they have only got a small amount of assets which come to £2,000.

While there liabilities come to £50,000 + £1,200 = £51,200.

Giving this person a total net worth of £2,000 – £51,200 = -£49,200

Although in the second example the person has a negative net worth they should not panic as they are still young and younger people will usually have a lower net worth due to their student debt and not being able to earn much money due to studying. They have also not had the opportunity to invest their income and benefit from compound interest. Do not worry if you are in this situation as it will in general improve with time.

If you are not young and have a negative net worth it usually points to you living beyond your means and over borrowing to pay for depreciating assets.

Really the only way to improve your net worth is to increase your income, buy appreciating assets or reduce your debts. By doing this over time on a consistent basis your net worth will increase. Your net worth will decrease by buying depreciating assets such as clothes and cars that reduce in value over time.

I hope this makes sense to you if not let me know and I will try and explain further. Hopefully it is self-explanatory. Let me have your comments and let me know how you are getting on with you net worth calculation.

The Normal Person

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