What is Net Worth?

 

Sooper Cooper

Howdy Wall Street Willy! In the newspaper, I read that someone has a really high net worth. But what is Net Worth anyway?

Wall Street Willy

Well, net worth is your assets, or whatever you own – like a home or a car, minus your liabilities, which is debt or money that you owe someone else – like car loan, student loan, credit card debt and a mortgage which is a load for a house.

So you just subtract your liabilities from your assets to get your net worth.

Sooper Cooper

Okay. Is my piggy bank part of my net worth?

Wall Street Willy

Yes, it is part of your net worth. Very small part of it, but it still is a part of your net worth.

Excellent question!

Sooper Cooper

Is my home part of my net worth?

Wall Street Willy

Yes, it is because it is an asset and something you own.

But a mortgage on your home would be considered as a liability because it’s something you owe a bank. So you have to subtract that from your assets.

Sooper Cooper

Okay. But what’s my net worth if my liabilities are more than my assets?

Wall Street Willy

Well, if that happens, then your net worth will be in negative. But if you pay back part of your loans, then it will start becoming positive.

So, let’s say that you have a house of $100,000 and a car of $10,000. But you have a mortgage or loan on your house for $150,000 and a car loan for $10,000.

Then, your $100,000 house plus your $10,000 car would equal $110,000, but your mortgage would be $150,000 plus $10,000 loan on your car which would be $160,000. So your net worth would be negative $50,000.

  • Assets: $100,000 house + $10,000 car = $110,000
  • Liabilities: $150,000 mortgage + $10,000 car loan = $160,000
  • Net Worth = Assets – Liabilities: $110,000 – $160,000 = -$50,000

But if you paid back $100,000 on your mortgage, then your net worth would be $50,000.

  • Assets: $100,000 house + $10,000 car = $110,000
  • Liabilities: $50,000 mortgage + $10,000 car loan = $60,000
  • Net Worth = Assets – Liabilities: $110,000 – $60,000 = +$50,000

Sooper Cooper

That’s really good. And, who should calculate their net worth? Probably only rich people, right?

Wall Street Willy

No, not at all – it is definitely not only for the rich people. Everyone should calculate their net worth.

From the richest person in the world to people like you and me, everyone should calculate their net worth to track their financial progress each year.

Even if you think that your net worth is really less, you should still calculate it.

Sooper Cooper

And when do you calculate your net worth anyway?

Wall Street Willy

You should calculate it at least once a year. That helps you track your financial progress over the years, so you know how much your net worth has grown or gotten smaller.

Sooper Cooper

Thank you very much for all the information about what net worth is!

Wall Street Willy

You’re welcome.

Remember, finance is your friend!

Post Author: easypf

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