There are a lot of terms in the world of personal finance that many people don’t understand or even know exist. This is especially true for high school and college students. Because of that, today I’d like to talk about a pretty basic, yet also important, topic:
Net Worth
In the simplest terms I can think of, the definition of net worth goes something like this: a single number that describes your entire financial situation. Generally, you arrive as this number using the following formula:
ASSETS – LIABILITIES = NET WORTH
Assets are things that have a monetary value – items like a house, car, and the money you have in savings, checking, and investment accounts. Liabilities are debts such as credit card balances, student loans, or a mortgage.
As an example, here is my current net worth:
Since I don’t have any debt, I have zero liabilities and my net worth must be a positive number. In a few months however, I’ll be taking out loans for school. Let’s say I sign for a $10,000 student loan. My net worth changes accordingly:
As you can see, net worth is simply a number that measures what you’re (financially) worth. A positive number is (typically) better than a lower number. I say typically because, like I mentioned above, my net worth is going to go substantially down in a few months. However, it’s for a pretty good reason – college. The degree I earn there should help me to make more money later on in life.
Some people don’t include their car or home when calculating net worth because those assets can’t usually be sold without a substantial lifestyle change. In my case, I feel that it artificially inflates my net worth. Really, I only have a few hundred in liquid assets. Selling my truck would net me some cash, but at the expense of not being able to drive to work – or anywhere.
That, in a nutshell, is what net worth is all about. With just a few quick calculations, you can see how you’re doing and make an adjustment for the next month if need be.
