It’s All About Your Net Worth

You hear people talk a lot about retiring. Most of them will tell you that they are “saving for retirement”. It’s funny to me that more people don’t talk about net worth in the same sentences that they are talking about saving for retirement. It’s impossible for someone to know that they are headed in the right direction for retirement if they don’t know where they are at TODAY. All the decisions that you make in life that relate to money should consider how it will affect your net worth today, and in the future.

Okay, okay. Let me briefly go in to what “net worth” is. The nutshell explanation of “net worth” is all of your assets minus all of your liabilities. What do we mean by this? Here’s an example:

Bob lives in a house worth $300000 that he owes $250000 on and drives a car that is worth $10000 if he was to sell it today, and he owes $5000 on it. He has $10000 in credit card debt and has $25000 in a retirement account. Other than those items, he pretty much doesn’t have anything else, other than a few trinkets that I wouldn’t count towards his net worth. Let’s figure out what Bob is worth:

Assets:

House worth $300000

Car worth $10000 (selling for this amount in the paper)

Retirement Account with $25000

Total Assets equals: $335000

Liabilities:

Owes $250000 on the house

Owes $5000 on the car

Has $10000 in credit card debt

Total Liabilities equals: $265000

Total Assets $335000

Minus

Total Liabilities $265000

Equals

Net worth of $70000

It seems like Bob is doing pretty well. If Bob is only 21, he’s doing great, but if Bob is 55, he’s screwed. He can roll the dice on social security and hope that it will take care of him, but I wouldn’t recommend that!

So this is the oversimplified version of how to calculate your net worth.

Want to try figuring out yours with a little help from MSNBC? Click here:

http://www.msnbc.com/modules/commerce/personalfinance/networth_wb3.asp?cp1=1

Want to see how you are doing relative to everyone else? (But you should really be more concerned with how you are doing relative to your own financial goals, but it’s still fun to see)

http://www.hughchou.org/calc/wealth2.cgi

More to come…..