How much are you REALLY worth?

Recently I was asked the question, "how do I calculate my net worth?" People mistakenly tell me they're worth xxxx, which is basically what they have in their bank account. There are different ways for people to calculate their net worth, but the general formula used to calculate your net worth is Assets - Liabilites = Net Worth. On certain statements people put their car down as an asset. That can be true and that can be false. Certainly in this tumultuous period houses can also be both liabilities and assets.

Here is how to define an asset and a liability. You can generally define an asset as something you can liquidate / sell to put cash in your hands. A liability is generally defined as debt or something that will cost you money. Examples of assets are real estate, cash, stocks, bonds, gold, 401k's, IRA's and pretty much any of the major things you can sell to generate cash. I wouldn't include your dining table as an asset unless your dining table top is actually a Picasso. If in fact your table top is a Picasso, you're either really rich or really dumb.

A liability is something you know you'll end up owing money on. Good examples of this include your mortgage, credit card debt, car loan, student loan...etc...

Here's where lines sort of blur. People will often tell you that your house is an asset. They're right, but they're wrong. A house is an asset, you can sell the house and get cash in your hands. However, you probably didn't buy the house outright...chances are you probably took a mortgage. That mortgage is considered a liability because you owe money to the bank (presumably.) People commonly refer to a home as an asset because they're assuming a house's worth is more than what you owe on it. (Asset - Liability = $$$$) During the housing crash recently experienced in the US that might not be the case anymore. I've heard of people purchasing a home for $500k and taking out a mortgage of $450k and now the house is worth $350k. Your house has now become a liability of $100k. Scary isn't it? This isn't really a musing about real estate, but I may eventually touch on that.

To keep everything straight, I recommend using a balance sheet. Take out a pad of paper and draw a "T-Chart." On the left hand side put "Assets" and on the right hand side, put "liabilities." Anything that can generate you money put it on the left. Anything that will make you pay money out of your pocket put it on the right. A lot like a checking account you'll want to add and subtract your debits and credits. Add up all your Assets and subtract all your Liabilities and you'll get your net worth. I hope that helps in determining your net worth.