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Financial Literacy Friday: Net Worth

Welcome back to Financial Literacy Friday where we’ll take today to talk a bit about net worth.  Net worth is simply the amount by which your assets exceed your liabilities and is a key measure of your financial well-being.  If your net worth is increasing it’s a good sign that you have strong financial health, whereas if your liabilities outpace your assets, the opposite is true.  So, let’s look at how that applies to personal finance and do some simple calculations of personal net worth.

Personal Net Worth

A person’s net worth is simply what’s left after they subtract their debts from their assets.  Some common debts are credit card debt, car loans, mortgages, and student loans. Assets include savings and checking accounts, value of your home, value of stocks or securities, and the market value of your car.  Your net worth is a good number to be aware of as it will fluctuate from year to year depending on how investments do and how much you’ve paid down your debt, and as I mentioned, is a good indicator of financial health.  On the other hand, if your net worth is declining, it may be possible to file for chapter 7 bankruptcy protection to help reduce debts. However, this does apply to alimony, child support, or taxes and stays on your credit report for many years.  

Net Worth Calculations

Now that we have a bit of background on how net worth works, let’s look at some actual calculations of net worth.  Consider someone with the following assets - primary residence valued at $400,000, an investment portfolio with a value of $150,000, and a car and other assets valued at $25,000. Liabilities are a mortgage balance of $100,000, a car loan of $10,000, and student loans of $100,000.

This person’s net worth would  be calculated as [$400,000 + $150,000 + $25,000] - [$100,000 + $10,000 + $100,000] = $365,000.  

As time passes this will change as you pay down debts or the value of your house or investments goes up or down, so it’s important to be aware of how those changing values affects your net worth.  

If there any questions or comments, leave them below or shoot me an email and I’ll be happy to chat with you.  

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