Today I used a quick calculator from Money magazine to determine that I have a net worth of -$60,000. But hey, that’s better than were I was a year ago, because I didn’t own a house. Back then my net worth was -$200,000. You’re probably wondering how taking on more debt reduced my net worth. And that is the trouble with net worth calculations.

What Net Worth Is
Net worth is basically your assets minus your liabilities. If you’re a corporation, this is an important number because it tells current and prospective investors where the company stands. For a family, the number doesn’t convey a whole heck of a lot.

Let’s look at a sample net worth calculation:

Assets
House value: $250,000
Car value: $10,000
Savings/checking: $2,000
Retirement: $50,000
Total: $312,000

Liabilities
Mortgage: $220,000
Car loans: $8,000
Student loans: $35,000
Credit card debt: $9,000
Total: $272,000

Net worth: $40,000

What Does Net Worth Mean?
So what does that number mean to a family? It certainly doesn’t mean that they have $40,000 available to them. They probably can’t borrow more than $5,000 against their home and selling it could take months, so it wouldn’t help in a cash crunch. The retirement savings could be tapped in a cash crunch, but it would incur high penalties and taxes. Selling the cars would only net $2,000, and then what would they drive?

Over time, the net worth number will rise because the mortgage will go down slightly each month while the home value will rise. The student loans and auto loans will also decrease over time. However, the value of the cars will also decline.

Cash on Hand Is More Important than Net Worth
So, even though they have a net worth of $40,000, they have only $2,000 cash on hand. If they had non-retirement stock investments, I’d also lump those into cash on hand. It would take a couple days to sell the stock and get the funds, but it’s fairly liquid. Other than that, this net worth calculation only tells their heirs what they might get from current assets if the parents died that day.

When I looked at our negative net worth number, my first thought was: eh. What does it matter? We have money in savings and no credit card debt. I know exactly why our net worth is low, but I also know that our large student loans aren’t going anywhere anytime soon. We’re in a pretty good position financially, and until my husband went out on disability we were able to save a decent portion of our income each month. To me, that matters more than whatever our “number” is.

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