What is Your Net Worth?

by Cameron on July 20, 2011

Here at OneSmartDollar.com, our goal is to help you build net worth, one dollar at a time through tips and instructions on various finance matters. Before you can learn how to build your net worth, you need to have a basic understanding of what net worth is and how it is calculated.

A person’s net worth is pretty basic, what you own minus what you owe. The idea is if you were forced to sell all of your belongings, would you be able to pay off all of your debts? What you own, also known as your assets, is made up of real estate (houses, land, etc), cars, jewelry, household items, retirement accounts, stocks, bonds, mutual funds, the cash value of your life insurance, and your cash accounts (checking, savings, and any other). Some versions of net worth will not include your primary residence but most will.

What you owe, also known as your liabilities, are made up of the principal on your mortgage, vehicle loans, credit card balances, student loans, and any other outstanding debt you have. Net worth takes into account the current market value of all of your assets. For instance, if you purchased your house, car, or another asset several years ago, the current value of it may have increased or decreased from your purchase price. The goal is for your net worth to be positive, having more assets than liabilities. The more positive it is the better. Banks will consider those with a negative net worth more risky than those with a positive net worth. The more risky you are, the less likely you are to get that loan. If you do get that loan, it will probably come with a higher interest rate. Net worth is a good indication of stable finances. If your net worth is negative, all is not lost. Your net worth changes with every financial transaction you make.

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