What is Net Worth?

To put it simply, an individual’s net worth is their total assets subtracted by their total liabilities. If you have a home worth $1 million, a stock portfolio of $500,000 and cars, boats and miscellaneous assets worth $250,000. Your total assets = $1,750,000. Now let’s say your home has a mortgage of $400,000 and your auto loans, boats and other assets have debt of $100,000; your total liabilities are $500,000.

In this scenario, your Net Worth is $1.25 Million. ($1,750,000 – $500,000).

What is an Asset?

An asset is a piece of property or thing that is considered to have value. Assets can include cars (which are highly depreciating assets unless they are unique to a collector or extremely rare), shares of a company or business, land, houses, jewelry, commodities, etc.

What is a Liability?

A liability is a debt obligation in which you are required to repay (typically repayment overtime). Liabilities can include bank debt, mortgage, auto loans, etc.

The Simplest Way to Understand the Differences

An asset is something you own and that has value and a liability is a debt or obligation that you must repay. Although, it’s important to note that property can be both an asset and a liability and assets can have liabilities associated with them.

• The main thing to understand here. If you own a home that has a value of $1,000,000 but you owe $500,000 on your mortgage, your only own 50% of the home and only $500,000 is contributed towards your net worth.

Calculating Net worth is relatively simple, you take the total value of your assets and subtract them from the total value of your liabilities. Anything with value can be included in your net worth (you might have $100,000 worth of antiques, $50,000 worth of video games, $150,000 worth of personal equipment and tools, etc.). Just make sure to include any debt associated with the assets you include in your calculation.

What is Liquid Net Worth?

Liquid net worth is a more important determining factor of net worth many times because it displays how much liquid capital you actually have available for yourself. The reasoning is quite simple, even though you may own a home worth $1,000,000, that home still has liabilities and expenditures even if there is no associated debt with it. Real estate and property taxes, monthly bills, insurance, etc. It’s also not something that you can write a “check from”. Moreover, unless you borrow against the home via a HELOC or other bank related debt, the home does not have liquid capital you can readily tap into. If you live in your home this is especially the case. However, the same is true with rental properties. if you wanted to sell the property, it would take quite some time for you to receive a payout and make that capital—liquid.

Stocks, Bonds, Cryptocurrencies & other equity related derivatives are all considered to be highly liquid since settlement on these financial vehicles is typically T +3. Meaning you can receive the settlement of funds with three days after the transaction. However, some stock can also be “locked”. Even though, an individual can have a very high net worth, like Elon Musk for example. They still may not have much liquid net worth and might consider themselves “cash poor”. As Elon Musk has famously said in the past since all his net worth is tied up in SpaceX and Tesla Stock, etc.

According to data from the FED, the average Net Worth of those under 35 is approximately $76,000. From age 35 to 44 it hovers near $300,000, from age 45 to 54 its around $725,000, and past the age of 55 the average net worth is above $1,000,000.

Tips for increasing you net worth

Take an active interest in investing!

This can be with real estate or with the stock market or other asset classes like cryptocurrencies, commodities, etc. Whatever the case, you really need to start learning to build up your net worth in the long term. Besides business; real estate and investing in stocks are typically the way most individuals in America build their net worth.

Real Estate

Real estate is a great way to increase your net worth. To be able to invest in real estate you will need a substantial down payment saved up. In order to invest successfully, you want to search for a rental property that has a good Cap Rate (depending on your location) and can pay for its self via rental income. In the long term this will allow you to make money from rental income and eventual pay down your mortgage overtime (eliminating the liability altogether overtime). Otherwise you have the option of flipping homes and reselling them after renovations. This however takes a good amount of elbow grease and can be a little riskier.

Investing

Investing in stocks is also a great way to build wealth and increase your net worth, in both the intermediate and long term. You should of course do your research and due diligence but for many, if you have a knack for investing, you should try investing your savings into the market. You should also consider maxing out Roth contributions per year and considering maxing out any employer matched 401k contributions. This is a great way to take advantage of tax incentives and build your net worth in the long term.