Spotlight on Sponsors: Why Knowing Your Net Worth Is Important
Knowing your net worth and understanding how it changes over time is one of the most important financial concepts everyone should understand. This number is used by banks, mortgage companies, insurance companies and you. Your net worth affects your credit score, which in turn affects your interest rates and things as mundane as how much you pay for auto insurance.
A simple definition
- Net value is the result of taking all the things you own (assets) minus what you owe others (debts and liabilities).
- Assets include cash, bank account balances, investments, your house, vehicles, or anything else that you could sell today for cash. Assets also include any businesses or business interests you own.
- Liabilities are what you owe others, such as a mortgage or car loan, and any other debt, such as a credit card or student loan.
Your net worth changes over time, reflecting how you spend your money. For example, if you have tons of bills and you spend more than what you bring in, your bank account balance will be lower. If you spend a lot on your credit cards, your debt will increase. The net effect is lower net worth.
Everyone has a net worth
Yes, everyone. Even a 6 year old with money in his piggy bank has net worth. If your child is saving for a bike, they’ll convert one asset (cash) into another asset (their new bike)!
Calculating your net worth
- The first step. Reconcile your bank accounts and your loans. Try to do this on a monthly basis, as these are the easiest parts of your net worth to track and calculate.
- Second step. Calculate the value of all your remaining assets. For some of your assets, such as stocks, you can go online and find the current value of the stocks you own. For other assets, you will need to estimate what you could sell that asset for today.
- Third step. Add up all your asset values, then subtract all your debts. All you have left is your net worth (and yes, your number could be negative)!
Why you should know your net worth
Knowing your net worth contributes to a bigger picture of your financial situation. Here’s why it pays to know your net worth:
- You want to apply for a student loan. You will likely need to submit an application that details all of your cash and other assets when applying for student loans. If your net worth is high enough, you may have to pay some of the tuition on your own.
- You want to take out insurance. Some types of insurance use your credit score as part of the calculation to determine your premium payments. Knowing if you have high net worth can help you get a great bonus amount.
- You want to diversify your investments. Some investments are only accessible to people with high enough net worth.
- You want to buy a house. Banks want to see that you have a lot of money in relation to your debts. If you have too much debt, you may need to either pay off the debt or increase your down payment.
Knowing your net worth and knowing how to calculate it can help you reach some of your financial goals. Please call if you would like help calculating and understanding your net worth.
– By Nancy J. Ekrem, CPA
PC of the DME CPA group
Certified Accountants and Business Consultants
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