Personal Net Worth

Before you go, we thought you'd like these...
Before you go close icon
Over time, you build up your personal assets. Your assets include savings and checking accounts, investments, and real estate. Some life insurance policies have a cash value that can be included in your personal assets.
To pay for some of these assets (such as buying an auto or home), we usually take on personal liabilities. Your liabilities include mortgage and other debt. Credit card debt is a major personal liability for some of us.
Your personal net worth is the arithmetic difference of your personal assets and personal liabilities. It is your personal assets minus your personal liabilities. A personal balance sheet is a graphical way of seeing your assets and liabilities. A common way to display your balance sheet is to use a t-account.
A t-account lists your personal assets on the left side, and liabilities and net worth on the right side. The two sides' totals must equal. This is a basic equation of accounting. The following t-account shows a personal balance sheet for a fictitious person who has a personal net worth of $32,000. You can modify the t-account for your use:
Personal
Assets
ValuePersonal
Liabilities
Value
Cash & savings accounts$10,000Credit card
balances
$8,000
Retirement
plan
$30,000Auto loan$15,000
Home$100,000Student
loans
$20,000
Auto & personal property$15,000Mortgage debt$80,000
Total personal assets$155,000Total personal liabilities$123,000
Personal net worth$32,000
Liabilities and net worth$155,000
You should notice a few things about the t-account. The most liquid (and safest) assets are listed at the top. The least liquid assets are listed at the bottom. These assets generally include your personal property, such as an auto, clothing, jewelry, or family heirlooms. Since you aren't likely to sell your personal property, these items are listed at the bottom.
A similar relationship exists in the t-account for personal liabilities. Those liabilities that must be repaid soonest are listed at the top. Those due the furthest from today are listed at the bottom. Listing your assets and liabilities with this principle in mind is good accounting practice.
An important assumption concerns the value of your assets. While the market value of most stocks and bonds can be easily determined, an appraisal may be needed to determine the market value of your home or other assets. Unless you have an appraisal, be conservative in estimating the value of your assets. Most lenders will discount your stated net worth on an application if the assets don't have a current appraisal value.
Your personal net worth is a moving target if appraisal or market values change, your personal net worth does too (by an equal amount and in the same direction). This is why your personal net worth is "as of" a specific date. A year, a month, even a day later, your net worth may change, depending on the composition of your assets and liabilities.
Knowing your personal net worth will also be helpful if you apply for credit. One of the very first things you do when you apply for a loan is complete a credit application. On this application, the lender asks for your personal balance sheet. You show your personal balance sheet so that the lender can make a more informed credit decision. (You should count on the lender to verify your figures before making a credit decision.) The lender knows that the greater your net worth, the greater your resources to pay off the loan in the event of a default.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
2008-07-21 14:37:19
Read Full Story

Sign up for Breaking News by AOL to get the latest breaking news alerts and updates delivered straight to your inbox.

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners