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Assets vs. Liabilities
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This and That:
Learning Financial Responsibility

Know Your Net Worth!

Well, at a high level, your net worth is the balance between the amount of property you own and the amount of debt you have. The correct terms are “Assets” and “Liabilities” but I’ll explain those later. 

To calculate your net worth you simply add up all your current positive account balances and the value of the goods you own and subtract from that the amount of money you owe. When you calculate this value, don’t throw in things at the purchase price you paid. It might come as a surprise to some people but consumer goods drop up to 30% of their retail value as soon as they leave the dealer’s shop or lot. As a good measure you can use about 50% of an item’s value within its first 2 years of purchase. After that, it’s not worth including it in your calculation because you’ll likely not be able to get significant amounts of money for it if you have to sell it. For a car you can take the bluebook value minus 10%, for a house you take the current fair market value.

So how do you know if your net worth is good or bad? Here is an early clue that you might be in trouble: If the number you come up with is close to 0 or even negative you need to take immediate action because your debt is too high and you don’t own enough items with resale value. If, on the other hand, your net worth is more than 6 months of your salary, you’re in good shape. However, keep in mind that your net worth is not the same as your cash value. We’ll get to that later.

Another key to your net worth is that, because it depends on depreciating items like your consumer goods and on fluctuating and sometimes appreciating items like your home, you have to calculate your net worth often. Update your view of your financial situation at least once a year. Why? Because your net worth is one of the most important criteria when it comes to making investment and purchase decisions. What you want is for your net worth to go up over time because a rising net worth means that you are accumulating wealth. But even if you aren’t successful in growing your net worth, it still is a good indicator of your financial state and should be examined before making any major money decisions. 

(read on ...) 

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