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net worth

How to Determine Your Net Worth

Posted on March 6, 2020March 6, 2020

You may have heard the term net worth but never thought it would be important to you. You know your salary if you are employed and maybe think of that as your net worth. Or you probably assume that it’s the amount of personal loan you could be approved for. You would be incorrect in doing so. Actually your net worth is a snapshot of what you are worth for a specific moment in time. Future salary or personal loans cannot be considered in this calculation since your company may close, you may be let go, or illness may stop you from earning any additional salary.

Actually your net worth at the current time is the sum total of your assets minus the total of all your debts. This sounds like an easy calculation. It is not. This article will help you determine your net worth.

Your assets may include part of your house and any other real property value you own or have a mortgage on. Let’s say you own a primary residence which has been evaluated by the local government to determine how much you have to pay them each year for property taxes. This is of little use in determining your home’s value. A better way is to look in the papers for sales of homes comparable to yours. This has to be in the same neighborhood as property values vary from place to place. It is best to average the last three sales providing they are less than a couple of months apart.

Once you have that figure you must subtract the mortgage pay off the amount if you do not own the home outright. Additionally, subtract about 5% to 7% of the selling price the house would bring which are the broker and closing fees for the seller.

You have to subtract the cost of fixing up your home if you are not going to sell it “as is”. Most people can sell their primary home tax-free even if it has increased in value. There are some cases where you may have to pay long term capital gains tax on the sale.

Ask any real estate broker whether you fall into this category. If so you have another subtraction. The balance is the first item that goes into the net worth equation. This must be repeated for any additional property developed or undeveloped which you may own.

The second item to be added into your net worth is the sum total of all your already taxed savings, checking, CD, stocks and bonds. Include the value of any government bonds you may own. IRA, 401K and another tax-free account can only be added in if you subtract any taxes you would owe if you withdraw them.

Your tangible assets should be added next. Gold, whether investment grade coins or ingots, silver, valuable furniture, antiques, cars (if their value exceeds any loans you may have), cash, collectibles, etc. should also be added in. In addition, anything else you own with a tangible value should be included.

The value of credit lines should not be added to this category. In fact, if you have used your credit lines such as credit card debt, personal loans, and home equity loan lines of credit, these should be included as subtractions from your net worth.

Money taken as loans for any purpose should be subtracted to the extent that they are still outstanding.

There are many people these days who actually owe more than their positive value is worth giving them a negative net worth. People in this category may want to consider going into bankruptcy proceedings since their primary residence, car and many necessities will be protected from creditors.

The biggest subtractions from net worth are the home mortgage, automobile, and other consumer loans and credit card outstanding balances. There are other financial instruments which subtract from net worth.

For example, if you have an apartment and pay rent, the rental agreement usually considers the full amount of the lease over the stated time as a debt. This is in effect a contractual installment loan.

If you have a two-year lease for $1,000 a month, then after one year you still owe $12,000. This is true with leased cars as well. Unpaid in full medical treatments not covered by insurance is a subtraction. Educational loans are subtractions until they are paid off.

When all things are taken into account, the remainder is your net worth. Take some time to figure out what your financial picture looks like.

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