Know Your Net Worth

























Episode 131 - Have you ever figured out your net worth? Do you even know how to do it? Sometimes just calculating your net worth can add discipline to your finances and may improve your financial future. In this episode, we’ll show you how to figure it out and what it all means.









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Transcript of Podcast Episode 131



In today’s episode, we take a second look at one of our favorite previous programs: Do You Know Your Net Worth?
Simply stated, your net worth is the amount by which your total assets exceed your total liabilities. Another often-used expression is that your net worth is the difference between what you own and what you owe.
Is it really that important to know your net worth? Many people use their net worth as a measuring stick, a target to shoot for at a given age. It is, in essence, a financial report card.
Many younger people, particularly those with substantial college debt, can start out with a negative net worth. In other words, their liabilities are greater than their total assets.
Over time, even a young person with a negative net worth should be able to build their assets and reduce their liabilities. Your net worth provides a snapshot of your financial situation at a particular point in time. It is probably the most accurate measure of wealth. And it can help you figure out what you’re going to need to do to reach your long-term goals.
Focusing on your net worth helps you move your financial focus beyond income alone. And it can put your debt level in proper perspective. For example, you may not be as concerned about your debt going from $60,000 to $70,000 if your assets go from $200,000 to $300,000.
Keep in mind that a one-time snapshot of your net worth isn’t going to tell you that much, other than whether you’re completely off track, but the exercise can be particularly valuable over time. This gives you a much better picture of where you’re going.
It’s often pretty easy to value your liabilities. That’s simply the amount you owe.  Finding a value for certain assets, though, can be difficult, especially when you own real estate. If you own a rental property, it may not be worth it to get an appraisal every year. But it’s generally a good idea to make a conservative estimate of the value of any property you own. That way you avoid overstating your actual wealth.
The same thing applies to a closely held business. Your bagel shop may generate a decent income, but how much money could you realistically get if you had to sell it in a hurry?
For many of us, the biggest source of our net worth is our primary residence. You need to figure out a realistic value for your home, and that means looking at the actual net selling prices—not the asking prices—of comparable homes in your neighborhood.
There are some financial professionals who prefer to focus on net worth without your primary residence. Residential real estate is not the most liquid of assets. In some areas, it takes time, effort and money to sell it. And some people like to point out that even if you do sell your home, there’s a good chance that you’re going to roll the proceeds over into another home.