Depending on your perspective, or your mood at the moment, you may respond to this suggestion with puzzlement (what is she talking about?), conviction (everyone is equally worthy!) or if you are in salary negotiations you might be thinking about your monetary value to your employer.
The many definitions of ‘worth” include:
Good or important enough to justify (whatever is specified)
A micro-banking program that empowers women
Having assets or income equal to
In this case, as you may have guessed, I am specifically referring to the last definition. In personal finance, net worth is defined as the sum of your assets minus the sum of your liabilities.
Assets can include: cash on hand or in bank accounts; investments in the financial markets; the current value of your home(s); the cash balance of life insurance policies; the value of collectibles; and the sale or trade-in value of any vehicle.
Examples of liabilities are debt of any kind (student or personal loans, credit cards, car loan, mortgages) and income tax or property tax due but not yet paid.
Net worth can be positive or negative. Often it is negative early in adult life or after a major life event (i.e. divorce) and hopefully it moves ever more positive with time and diligence. It is an important indicator of your current financial position and a reference point for measuring progress.
It is also relevant for certain investment opportunities which require you to be an accredited investor to participate. This accreditation affects eligibility and information requirements for unregistered (with the SEC) securities and assumes a level of sophistication and ability to assume risk. One way to be accredited is to have a net worth =>$1 million (single or jointly as married couple) not including the value of your principal residence. There is also an alternative income definition.
Note that this is accredited investor evaluation is controversial. On the one hand, net worth is not necessarily an indicator of sophistication nor risk tolerance. On the other, aside from the 2011 amendment removing the inclusion of principal residence valuation, this million dollar figure has not been indexed for inflation and may well now be quite insufficient to withstand a risky venture. Stay tuned as the same amendment requires the reevaluation of this definition every four years beginning 2014 and so comes due this year (2018).
In additional to being a key indicator of financial health, net worth is an important component of a personal financial statement which is often used for business or personal loans. For what it’s worth, I believe it’s worth your time to calculate it. :) If you would like a template to help you measure YOUR net worth, send me a note and I will happily email it to you. In the event you fear a negative result, perhaps you’ll appreciate the definition offered by Benjamin Franklin:
“Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones”
No calculations or assets are needed for a positive net worth by that definition! As always, your thoughts are welcomed and encouraged.