Simply net worth may be defined by a mathematical equation:
assets – liability = net worth. Assets include all your cash in savings and checking account, equity, investments, retirement accounts, jewelry, art, antiques, furniture and every other thing which has its own value. On the contrary liabilities are made of all your debts such as car loan, student loan or housing loan, mortgages and credit card debts. By calculating and knowing your net worth you may become aware of your financial life. Also your net worth is a symbol that how strong or weak is your financial condition. Normally net worth is positive but in some cases it may be negative also. Generally it is negative when you are at the start of your career and you have to pay your student loan. It may be understood by an example. Assume you are earning $ 45000 a year, you have saved $ 5000 in your savings account, you also have $ 3000 in your emergency savings account, current value of your car is $ 7000 but you don’t have anything else of considerable value. You have to pay $ 25000 against your education loan. So your assets value is $ 15000 and your liability is $ 25000, thus your net worth is -$ 10000. Gradually when your student loan will become low it will move towards zero and when it is totally paid it will become positive.
To calculate correct net worth all the items of value should be added to assets. True assets are those, which can be sold at any time, and someone else will pay you well to acquire these items. Cash, savings in your saving and emergency account, investments, retirement funds, home, furniture, and nice pieces of jewelry, collectibles and antique items fall into this category. All type of loans and advances which you have to pay either in installments or at a time, all type of mortgages you have made and all debts related to your credit card, whether created by purchasing anything or interest and penalties due to not paying your dues in time will fall into the category of liabilities. A car loan is a liability but its present value should be included in assets. Here it should be kept in mind that car is a depreciable item, its value decreases every year, and you should consider its present value only, when you are adding it in assets.
Periodicity of calculating net worth: It is not advisable to calculate your net worth at daily or monthly basis. Once or twice a year will suffice the purpose to know the balance sheet of your financial health or to ascertain that you are making financial progress or not. Even if it is negative you will feel good by watching it coming closer to zero, this is also a sign of financial progress which you are doing gradually. Net worth also indicates, how strong or weak the party is for lending purpose, and almost all banks and other financial institutions view it seriously before financing a company or individual. Net worth also is a clear indicator of credit score.
Protection of net worth: There are certain factors which have an impact on your net worth when they occur. There may be changes in stock market, or there may be changes in the value of your home. There also may be some months, especially festive months or the months of a function in your family or relations, when you have to make heavy purchases and all these factors will influence your net worth according to their nature. You should not worry about small month to month changes in your net worth, but long term changes should be addressed properly when they happen. Constant and regular saving, investing at regular intervals and paying off your debts when they are due to repay will certainly improve and protect your net worth. You should fix short term; medium term and long term financial goals for yourself, and always try hard to achieve them within proper time period. Don’t get over worried for your net worth because it is just a snapshot of your total assets and debts.