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Question:


How do I figure out my net worth?
-Micah


Answer:


Take the value of what you’ve got, subtract what you owe, and there you have it – but it’s not really that simple. You have to know the correct value to assign to each of your assets, for instance. The price you paid is one way, but if an asset has gone up or down in value since you acquired it, it probably is more valid to use the market price if you know it. It’s easy enough to figure in the case of something that trades publicly and often, like shares of stock, but more difficult in the case of your home. For that, you could use the latest appraised valuation, if an appraisal was done recently, or make a good guess based on what similar homes in your neighborhood have been selling for.
 
You also need to factor in the ease with which you can cash in your assets. Many valuable items are difficult to sell, either as a matter of practicality or because there are high costs involved, including potential tax liability, or due to some other impediment. There can be tax consequences to selling stocks or bonds. That is also the case when it comes to selling your home, something that is also likely to be a cumbersome, expensive process. When it comes to your pension plan, there are taxes, penalties and various rules that your employer has put in place that make cashing out difficult and keep your assets at arm’s length. Probably a more meaningful figure than your net worth is your liquid net worth, or the value of what you could convert to cash readily, less the amount you owe on those assets or on any others that no longer hold value. So on the plus side, don’t count your home or 401(k), and on the minus side, count your credit card debt but not what you owe on your mortgage.
-Conrad de Aenlle



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