Calculating net worth is as simple as taking your assets and subtracting your liabilities. The number you have left over is the total amount of money you are worth today. The tricky part is correctly identifying your assets and liabilities. Your home, for example, can be both an asset and a liability.
Assets are those things that you own and have a monetary value. In other words, you can sell or exchange them for cash.
Liabilities are those things that cost you money.
As you calculate your net worth, you can put the equity you own in your home in the asset category, but the balance on the mortgage falls under liabilities. The same holds true for your car.
Assets Can Include:
- Cash and Bank Balances
- Certificates of Deposits (CDs)
- Stocks and Mutual Funds
- Retirement Accounts (401k and IRA)
- Home Equity
- Jewelry and Collector’s Items
Liabilities Can Include:
- Credit Card Debt
- Student Loans
- Car Payments
- Mortgage Balances
Once you have totaled these items up and figured out your net worth, you can more accurately plan your financial future. You know where you stand financially and what your next step should be – get out of debt or build more assets.
Once you have built assets that produce an income that exceeds your liabilities and personal standard of living, you can claim to have achieved financial freedom.
