Your Net Worth: Part One
In the last article I introduced you to assets and liabilities. You should now have a list of everything you own and everything you owe. So what do you do with this information?
One thing you do is to see how much you are worth. Simply subtract what you owe from what you own and you have your Net Worth. What that number means depends on how you came up with it.
For instance, there are several ways to come up with what your assets are worth. You could see what similar items are selling for these days. Or, you could see what you can get on the open market for your stuff. Unless you have a true antique, what you can get is often less, sometimes a lot less, than what it would cost you to buy it new.
For example, you may have spent $800 for a nice couch that looks great in your living room. Can you get $800 for it now? My experience is that it is nearly impossible to get someone to buy a used couch. If no one wants to buy it, its current worth is zero.
Is the value of your couch $800 or zero? It depends on why you want to know. If you are deciding on how much insurance to get, then $800 is the better figure. If the couch burns up in a fire, it will cost you $800 to replace it. On the other hand, if you want to know what you could sell it for if times got tough, somewhere in the $0 to $200 range is probably more accurate.
For our purposes, I’d like to know what the liquidation value of your assets is. Go item by item and answer this question: if I lost my job and couldn’t pay my car loan this month, would I be willing to sell this? If the answer is yes, then write next to it what you think you could get for it. Don’t know? I find that E-Bay is a great place to get an idea of what something is worth to someone else.
Now, compare this new asset value to your liabilities (those pesky loans you owe). You’ll glean from this two important pieces of data. The first is a real-life example of why you shouldn’t load up your credit card with junk purchases. Look at all that stuff sitting on or in your dresser, shelves, and closets that you are still paying for. Likely they have a sale value far below what you still owe on them.
The other piece of data is, in my opinion, your real net worth. If you sold everything you’d be willing to sell to pay off all that you owe, how much, if anything, would you have left?
If you go through this exercise, along with those on cash flow that we looked at in earlier articles, you will have a pretty good idea where you stand financially. Don’t get discouraged if all is not good news. You have plenty of company.
Now that you know where you stand, you can begin getting your financial house in order.
Wichita Falls. You may e-mail him at Gary@PersonalMoneyPlanning.com
Gary Silverman, CFP® is the owner of Personal Money Planning, a financial planning and investment management firm located in