Personal Net Worth: Financial Planning 101
What is personal net worth? Do you know what it means, how it affects you, or how to calculate it? Calculating your net worth is an essential tool in your financial toolbox because it plays a vital role in achieving financial health and wealth. Net worth is the most important measure of a person’s financial status at any given time. Continue reading to learn about the basics of personal net worth to help you plan for a successful financial future.
What Is Net Worth?
Net worth is the dollar value of your assets minus the dollar value of your liabilities. Very simply, it is a snapshot of your financial status during a given time. Since personal net worth fluctuates as assets and liabilities change, it is important to use other tools when determining your financial health. For example, let’s say your net worth is –$5,000, you earn $100,000 annually, and your debt is solely a low-interest car loan. Conversely, you have a net worth of $5,000, earn $20,000 annually, and have children. Would you prefer the negative or positive net worth? We’re willing to bet you chose negative net worth. It’s important to realize negative net worth is not necessarily bad or an indication of financial trouble.
Personal Assets: A Beginner’s Guide
Personal assets are things you own that have a monetary value, like a house or stocks. It is important to know what your assets are worth to help you protect them and achieve your financial goals. Here are a few reasons it’s important to know your asset value:
- Retirement: having a large sum of assets will replace your salary and cover your living expenses.
- Insurance: identifying and insuring assets will help you protect them in the event of an accident, natural disaster, or theft.
Examples of Personal Assets
There are several types of personal assets, but for the sake of this article, we are only going to discuss four.
- Non-qualified assets are taxable investments such as brokerage accounts and checking or savings accounts.
- Retirement assets are tax-deferred investments like 401(k), 403(b), rollover IRA, or SEP-IRA plans.
- Real estate assets include your primary residence, vacation homes, rental properties, and land.
- Personal assets include personal items such as automobiles, jewelry, or art.
Personal liabilities are debts that you owe to someone, like a mortgage or student loans. The debts can be large or small and vary from person to person. It is important to track your liabilities to manage your debt and achieve financial stability.
Examples of Personal Liabilities
Personal liabilities can be broken into the following categories:
- Short-term liabilities: home equity lines and credit cards.
- Long-term liabilities include primary residence mortgage, real estate loans, auto loans, and personal loans.
Determine Your Personal Net Worth
Assets – Liabilities = Net Worth
This amount is your financial worth on any given day.