How to Calculate Net Worth
Brent asks how to calculate net worth. Dave explains.
QUESTION: Brent on Facebook asks how to calculate net worth. Dave explains.
ANSWER: Net worth is a simple calculation. It is what you own minus what you owe—your assets minus your liabilities. What is the value of the things you own minus any debts that you have? That is your net worth. When that figure becomes a million dollars, when your net worth is a million dollars, that’s when you are declared a millionaire.
There’s another phrase people sometimes use. They use the phrase “cash millionaire,” which means their net worth is in excess of $1 million, but they have $1 million cash that they can get a hold of. It’s a very interesting place to be. Cash millionaire means it’s not all tied up in a business or retirement or in a home or those kinds of things. That’s what you’re after.
Some people get real picky about what you include in the “what you own” column. Do you include the current market value of what you own—not what you wish it was worth, not what you paid for it? If you paid $20,000 for the car and the car is worth $12,000, $12,000 goes in there. That’s what you could get for the car were you to sell it. It’s not what you paid for it. What could you get for it today?
A lot of people don’t include personal property in that. If you want to figure a net worth more from a business perspective or a pure financial perspective, they don’t include stuff like cars and boats and clothing and jewelry and that kind of stuff in a net worth statement. Truthfully, if you’re going to get to the point that you’re a millionaire, you should have a small percentage of your world tied up in that. In other words, you wouldn’t want to have $500,000 in cars and then say you’re a millionaire and that’s part of the figure because that’s going to be an absolute breakdown then. You’re going to have problems with that.