Do You Know Your Net Worth?

A net worth statement is a financial tool that shows your financial position at a given point in time. It is like a “financial snapshot” that shows the dollar value of what you own and what you owe. This relationship can be stated as: Assets - Liabilities = Net Worth.

Net worth is the dollar amount you would have if all your assets were sold today for their current market value and all your debts were paid in full. For example, if your assets total $108,000 and you currently owe $8,000 in credit card balances, loans, and other debts, your net worth today is $100,000.

To calculate your net worth, first determine the value of what you own. This value should be expressed as “current, market value.” In other words, what assets would be worth if they were sold today to a willing buyer. If recently purchased, the purchase price of your house or other real estate can be used. Otherwise, consult a real estate agent to get a market quote on the value of the property if you were to sell it now, or check recent sales of similar properties.

For personal possessions such as vehicles, household goods, clothing, and recreational equipment, the value is more difficult to determine. Most of these items lose financial value (depreciate) from the day of purchase. However, if recently acquired, the purchase price could be used. Otherwise, consult newspaper classified ads or visit some garage sales to see what possessions usually sell for.

For life insurance, list only “cash value” policies (what you could borrow from a policy today). Term insurance pays only if the insured dies, and thus has no “cash value” for asset purposes. For investments, such as stocks and bonds, check the financial pages of a newspaper or a financial Web site, or call your broker for current price information.

In the liabilities section of a net worth statement, list the dollar value of debts. For mortgages, list the balance due. Also list unpaid bills due within the next month, credit card balances, and longer-term debts such as student loans.

What does a net worth statement tell you? Obviously, if liabilities exceed the value of assets (negative net worth), you need to take corrective action immediately. However, even a person with a high net worth may have financial difficulties. Having many assets with low liquidity (inability to immediately convert assets to cash) may mean not having adequate cash available to pay current expenses if income suddenly decreases.

Having an updated net worth statement can be helpful when making financial decisions. Most loan applications require the financial data that appears on a net worth statement. Having a copy can speed up the loan application process. If you are overloaded with consumer (non-mortgage) debt, calculating your net worth can highlight the importance of savings and debt reduction to improve your finances.

Rutgers Cooperative Extension has a free fact sheet, “How Much Am I Worth?” (FS012) that includes a worksheet to make a net worth calculation. To obtain a copy, visit the Web site www.rce.rutgers.edu/pubs/pdfs/fs012.pdf.