The average person may have different reasons for calculating their net worth. They may want to know this figure for estate planning, to create a personal financial statement for lending purposes or to be aware of their numbers so they can improve them.
No matter the reason, it’s important to understand how to arrive at this number accurately — and which assets and liabilities to include in this calculation. This quick guide will provide a few tips on what you should and should not include when calculating your net worth.
Understanding Net Worth
“A person’s net worth statement is a rough estimate of what a person’s collection of assets is worth after paying all its liabilities. Basically, it shows the net of what you own minus what you owe,” Robert R. Johnson, a professor of finance at Creighton University, says
Assets typically include cash, real estate, investments and valuables such as art or collectibles, while liabilities include debts such as mortgages, car loans, credit card balances and student loans.
Net Worth Calculation Example
Here’s a simple example to help you understand how to calculate net worth:
List of Assets
— Home value: $250,000
— Automobile No. 1 market value: $15,000
— Automobile No. 2 market value: $10,000
— Savings account balance: $5,000
— Retirement account balance: $30,000
— Total assets: $310,000
List of Liabilities
— Mortgage balance: $200,000
— Automobile No. 1 loan balance: $10,000
— Automobile No. 2 loan balance: $5,000
— Credit card debt: $3,000
— Student loan balance: $15,000
— Total liabilities: $233,000
To calculate net worth, subtract the total liabilities from the total assets:
Net Worth Calculation:
Total Assets ($310,000) – Total Liabilities ($233,000) = Net worth $77,000
Knowing What to Include in Your Net Worth Calculation
These are the certain things that belong in your net worth assets and liabilities:
Assets
— Liquid assets: Cash and cash equivalents, checking and savings accounts.
— Investment accounts: Stocks, bonds, mutual funds, retirement accounts (401(k), IRA) and cryptocurrency.
— Insurance: Insurance Policy Cash/Surrender Value.
— Real estate: Primary residence, rental properties and land.
— Other valuable assets: Vehicles, collectibles, art and valuables like precious metals.
— Business interests: Value of ownership in a business or partnership stakes.
Liabilities
— Secured debt: Mortgages on properties and car loans.
— Unsecured debt: Credit card balances, personal loans and student loans.
— Other obligations: Any outstanding debts or obligations that do not fall into the above categories, such as medical bills or unpaid taxes.
What to Leave Out of Your Net Worth Calculation
This is where things can get a little controversial. There are different schools of thought regarding whether some assets actually belong in your net worth calculation and to what extent. But for the sake of this discussion, we’ll simply focus on the technical reasons net worth calculations differ.
Eric McDermott, a certified financial planner at Pacific Advisors, says there’s a good reason to leave your primary residence out of your net worth calculation.
“For retirement income purposes, you may only wish to include assets that generate income, or that can be sold/liquidated to generate income. For many, that might mean excluding a primary residence as a retirement asset,” he says.
[Related:Which Generation Has the Most Wealth?]
“If it doesn’t bring you income, and you don’t plan to sell it because you need to live in it, then one may not want to use it for retirement net worth,” he adds.
Lauren Lippert, a certified financial planner at MAI Capital Management, says, “Items to leave out would be assets that have sentimental value only rather than monetary. In addition, I would only include funds owed to you by others if you believe you will be repaid.”
A Few Net Worth Caveats
Johnson explains how market value comes into play when calculating net worth: “The key assumption with a person’s net worth statement is that both assets and liabilities are priced at market value.”
“When you purchase an automobile for $70,000, that automobile depreciates in value. When calculating net worth, the current market value of the automobile would be included, less the amount one owes on the loan for that automobile,” he adds.
Hector Castaneda, a CPA in Washington, says it’s best to exclude “intangible assets” like future earning potential.
“Your anticipated income in the future is not a current asset unless it is already earned,” he says. He also says to exclude noncash employee benefits and perks, like company discounts or health benefits, from your net worth.
[Related:Are You a Mini-Millionaire?]
Knowing What to Include in Your Net Worth and When
Depending on why you need this number, you may arrive at varying figures for your net worth, says Belinda Herzig, national senior wealth strategist at BNY Wealth Management.
“There are different considerations given to a net worth statement prepared for ‘estate planning’ purposes versus one prepared for ‘lending and credit’ purposes,” she says.
“For estate tax purposes all assets should be listed on the net worth statement, including tangible personal property like clothing, jewelry, furniture, cars, collections and art. The value of TPP is part of the inventory for estate tax purposes so assuming a fair market value will help to estimate one’s estate tax liability. Even airline miles have value,” she adds.
“For ‘credit’ purposes, the liquid assets (less liabilities) listed on the net worth statement support the lender’s consideration in determining a borrower’s ability to meet an obligation. Non-liquid property that takes time to sell and tangible personal property may be less relevant considering fluctuations in value where a banker/lender is looking at assets for their liquidation value,” Herzig says.
[READ: 9 Ways to Grow Your Assets in 2024]
Here’s a quick breakdown of how your net worth calculation may differ based on the scenario:
— Estate planning: Assessing values of investments and properties for heirs.
— Bankruptcy: Determining asset liquidation and exemption rules.
— Calculating net worth for fun: Understanding personal financial status for personal growth or curiosity.
— Retirement planning: Evaluating future needs and resources to ensure a secure retirement.
Summing It Up
Regardless of the scenario, determining the right assets and liabilities to include in your net worth is essential to accurately assessing your overall financial picture.
Misclassifying or omitting items can lead to inaccurate evaluations and potentially throw off your financial planning strategy. For this reason, you should keep track of your assets and liabilities to the best of your ability (or with qualified professional help.)
Using accurate calculations ensures that your net worth figure reflects your true financial standing, which ultimately supports informed decision-making.
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What You Should Include in Your Net Worth — And What You Should Leave Out originally appeared on usnews.com
