Investopedia defines net worth as “the amount by which assets exceed liabilities.” This figure can be used both as a measure of personal wealth as well as an indication of the strength of a company.
Calculating net worth is not difficult. The following steps itemize how to go about determining personal wealth.
List All Assets to Calculate Net Worth
Assets can be broken down into two major categories.
- Fixed assets are long term tangible assets. Usually these items cannot easily be converted into cash and they include; property, vehicles, jewelry and even furniture.
- Current assets are short term tangible assets that can be converted to cash fairly quickly. They include cash at the bank, investments in bonds and stocks, life insurance policies and annuities.
All assets should be laid out on the first half of the personal financial statement to give a total of the value of assets owned.
List All Liabilities to Calculate Net Worth
The next step is to set down all the liabilities. These can also be broken down into short term liabilities such as; credit card debt, taxes due and bills outstanding.
Long-term liabilities are those debt obligations that are expected to take a longer period of time to pay off such as mortgages, car loans or any other debt obligation that has a repayment term of greater than three to five years.
Be Cautious When Determining Values
It is wise to always err on the side of caution when it comes to assigning values to assets and liabilities, but it is especially important to be weary of asset values. This is because it can be tempting to inflate the value of assets; it may even occur unintentionally.
Assets should be valued at current replacement cost or market value. For instance, if a vehicle was purchased at $15,000 two years ago it cannot be listed on the asset side at cost, but must be listed instead at the market value which may be $8,000. An even better approach would be to list the car at the book value or the written down value used by the bank that issued the car loan.
Free Downloadable Personal Financial Statement
It is possible to draft up a spreadsheet in excel or even to use pen and paper to work up this simple equation, but this downloadable spreadsheet (click Download Now to start including information immediately) has everything already neatly laid out. If additional rows are needed to include additional assets or liabilities they can be added.
This simple calculation gives a lot of powerful information and can be used for a variety of functions. Find out why understanding net worth is important.
Natalia Jones - Natalia Jones is a full time freelance writer. She has an Advanced Diploma in Financial Management (ACCA) and she has previously worked in ...
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