Your Net Worth

by Ron DuBois on June 8, 2011

In the last post I wrote that one of the first places to start when establishing your current financial reality is determining what your present net worth is. I gave a rather simple, but accurate explanation of what net worth represents; everything that you own minus everything that you owe. However, like many areas of finance there is more to this than meets the eye.

Before you jump in with your calculator I want to write a little about what exactly should be counted as an asset and what should be counted as a liability. Once you have a good understanding of what we’re counting we can more accurately discover what the difference between the two figures.

What exactly is an asset?

Most of us have bought into the definition of an asset as something that has value and can be converted into cash. If we define an asset this way you would count the equity in your home, your car, your jewellery, etc. as assets. This is a fine way to define an asset if you want to feel good. However, if you want to blow away the smoke and see where you really stand financially we need a better definition of what constitutes an asset.

Robert Kiyosaki [Rich Dad, Poor Dad] defines an asset as something that generates an inflow of money. If we use this approach anything that costs us more to own than it generates is not an asset, but rather those things are liabilities. Personally I subscribe to Kiyosaki’s definition for two reasons. First of all I see it as a more realistic view of my current situation. It does me no good to think I am better off than I really am. Second it gives me a perspective on future purchase decisions that will help me achieve my financial goals.

Using Kiyosaki's definition Assets can include a profitable business, real estate that is earning more that it is costing, and investments in stocks, bonds, and mutual funds.

Does this mean we never buy anything that isn’t an asset, of course not. It simply gives us another perspective to consider before we buy that next shiny new object. When I get to the section on budgeting I'll revisit this idea and provide more insight.

Now with that said, it is important to figure your net worth the traditional way to get a realistic snap shot of your current financial situation.

Make three columns on a clean sheet of paper. Label them “Things” “Value” “Liability.” Under the “Things” label write all the stuff you own, cars, boats, furniture etc. Be sure to include any stocks bonds, or mutual fund shares in this list as well as cash.

Under the “Value” label write how much you could sell that item for right now. Be realistic here. Not what it is worth to you, but rather how much would someone else be willing to pay you for it.

Under the “Liability” list all of your debts.

Finally subtract the total liabilities from the total values. This is your net worth (even if it is a negative number).

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