Know Your Net Worth!
Well, at a high level, your net worth is the balance between the amount of property you own and the amount of
debt you have. The correct terms are ďAssetsĒ and ďLiabilitiesĒ but Iíll explain those later.
To calculate your net worth you simply add up all your current positive account balances and the value of the goods you own and subtract from that the amount of money you owe. When you calculate this value, donít throw in things at the
purchase price you paid. It might come as a surprise to some people but consumer goods drop up to 30% of their retail value as soon as they leave the dealerís shop or lot. As a good measure you can use about 50% of an itemís value within its first 2 years of purchase. After that, itís not worth including it in your calculation because youíll likely not be able to get significant amounts of money for it if you have to sell it. For a car you can take the bluebook value
minus 10%, for a house you take the current fair market value.
So how do you know if your net worth is good or bad? Here is an early clue that you might be in trouble: If the number you come up with is close to 0 or even negative you need to take immediate action because your
debt is too high and you donít own enough items with resale value. If, on the other hand, your net worth is more than 6 months of your salary, youíre in good shape. However, keep in mind that your net worth is not the same as your cash value. Weíll get to that later.
Another key to your net worth is that, because it depends on depreciating items like your consumer goods and on fluctuating and sometimes appreciating items like your home, you have to calculate your
net worth often. Update your view of your financial situation at least once a year. Why? Because your
net worth is one of the most important criteria when it comes to making investment and purchase decisions. What you want is for your
net worth to go up over time because a rising net worth means that you are accumulating wealth. But even if you arenít successful in growing your
net worth, it still is a good indicator of your financial state and should be
examined before making any major money decisions.
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