One of our readers, when filling out a Know Your Client (KYC) document with their adviser, was asked for their net worth. If you were asked for your net worth would you know what it is? Do you even know how to figure it out?
The basic definition of your net worth is the value of everything you own (assets), minus your debts (liabilities). It’s what you own, minus what you owe. Throughout your life your net worth can rise and fall depending on what assets you own, and how much debt you owe. Let’s look at an example of someone’s net worth and how it might change.
MR. X owns a home with a market value of $300,000. He also has an investment portfolio valued at $150,000. His car and other assets are valued at $25,000. The total value of everything Mr. X owns is $475,000.
Now let’s look at Mr. X’s liabilities. He has a mortgage of $225,000. He also has a car loan of $10,000, $5000 in student loan debt and there is a $5,000 balance on his credit cards. His liabilities total $245,000.
When you subtract Mr. X’s liabilities from everything he owns, his net worth comes to $230,000.
Five years later how might Mr. X’s net worth have changed?
After a dip in the housing market, the market value of his house has dropped to $275,000. However, his investment portfolio has risen to $250,000. The value of his car and other assets has dropped to $15,000. The total value of everything Mr. X owns is now $540,000.
Mr. X’s liabilities have also changed. His mortgage is now $195,000. He has $4,000 left on his car loan and his student loan and credit card debt have been fully paid. His liabilities now total $199,000.
When you subtract Mr. X’s liabilities from everything he owns, his net worth now comes to $341,000.
Your net worth can change a lot throughout your life as you acquire more property or investments, or pay off or take on more debt. It’s important to know if your net worth is increasing or decreasing to in-turn know if your overall financial situation is improving or getting worse.