How To Calculate Your Net Worth And Why Is Important For Your Debt
Have you ever heard of the term net worth? Do you know how it can affect your debt? Or even your business?
We will solve all your doubts and clarify some important points that surround your net worth. You will be able to track your financial health, illustrate your progress, and pay off your debt. Net worth records all your financial achievements in one place, allowing you to take control of your money and make wise decisions about your financial future.
What is net worth? Which are my liabilities? What can I count as my assets?
First things first, before you start calculating your net worth you need to be familiar with the terms, in order to determine the right amount. Your net worth is the dollar amount of your assets minus all your liabilities (debts). Simple, right?
Your liabilities are everything that you owe, and you can find two categories of liabilities. The current liabilities, like the purchase of goods or services that you will pay for, after the end of a fiscal year (or after 12 months). On the other hand, we have long-term liabilities, which include auto loans, mortgages, student loans, credit card balances, if not paid in full each month. Basically, everything that exceeds the fiscal year (or 12 months).
Now your assets are everything you own (that can be physically held) or converted to cash. You can find three different categories for your assets. Your current assets are cash, bank accounts, short-term investments, inventories, etc. Then, you have the long-term assets, including everything that will mature in one year or later (e.g., stock or bond). Last but not least, fixed assets, also called permanent or illiquid assets. They are great if you are planning to build wealth, but it takes longer to convert them into cash. Some examples of fixed assets are buildings, land, equipment, and vehicles.
An important distinction to know about your assets before you calculate your net worth is knowing your intangible assets. This formula changes for businesses, but we will address it in the following paragraphs. Intangible assets are everything you own but cannot be physically touched or held. Inside this category we can find copyrights, patents, trademarks and intellectual property. We understand these assets are valuable to your business. However, banks and investors only consider your intangible assets valuable if another company is willing to buy them.
Net Worth For Your Finances
As we explained above, to calculate your net worth you need to subtract all your liabilities from your assets. The value that is left it’s your net worth. If your assets are higher than your liabilities, you can pay your debts with the resources you already own. Having enough money to spare.
Nonetheless, if your liabilities surpass your assets and the result is negative, you cannot currently pay off all your debts and you will face an adverse financial health. This will keep you out of your dream life without debt.
We suggest listing everything you owe and target first your highest-interest debts. Next, you need to talk with your creditors (specifically credit card companies) to apply for a lower interest rate. If creditors denied your application, consider using a balance transfer credit card, which allows you to move your debts (student loans, mortgage debts or car loans) to another account with lower interest rates, but be aware of the hidden fees in your credit card.
Formula: Net Worth= Total Assets − Total Liabilities
We encourage you to calculate your net worth periodically, so you can document your financial health, feeling motivated to save more, spend less, and stay debt free.
Net Worth For Business and Companies
When you have a business, the formula used to calculate their net worth changes. The debt-to-net worth ratio formula is implemented to determine how financially healthy the company is, whether the business can use its assets to pay off its debts if things go wrong and future investors are aware of how much of a company’s financing involves debt. For companies, intangible assets cannot be used to pay liabilities, so they are subtracted from assets.