While $10 billion may be a hard concept to get your mind around (it is for me anyway), the concept of net worth is fairly simple.
Net worth is the difference between your assets and your liabilities. Put another way, it’s the difference between what you own and what you owe.
Assets are things of value that you own. They include your home, cabin, and other real estate as well as financial assets like IRAs, 401(k)s, stocks, bonds, mutual funds, etc. The term “assets” can also include personal assets like your car, jewelry, artwork, and collectibles.
If you own a business, the value of the business would also be considered an asset and would count towards your net worth.
Life insurance cash value also contributes to your net worth. However, life insurance death benefits don’t count towards your total until after you die.
Liabilities are what you owe other people. Your mortgage, car loan, student loan and other debts are liabilities.
Subtract your liabilities from your assets and you have your net worth – voila!
A Hypothetical Case study …
Joe and Sue own a small home Washington County with a few acres of land that they bought in 1989. Today it’s worth about $350,000 and they still owe $50,000 on their mortgage. They also have a cabin in Wisconsin that they inherited from Joe’s mother. It’s paid for and valued at $275,000.
Joe teaches math and has a 403(b) plan at work with a balance of $300,000. Sue owns an antique store in White Bear Lake, Minnesota. The value of her business is roughly equivalent to the value of her inventory: $50,000.
Like most people, they have checking and savings accounts, IRAs, and a small amount of savings in a brokerage account. All told these assets add up to $185,000.
Their life insurance doesn’t have any cash value, but the two policies they own have a combined death benefit of $250,000.
Other than their mortgage, Joe and Sue’s only debt is a $25,000 line of credit they took out for some house projects.
Pop quiz: What is Joe and Sue’s net worth? If you guessed $1,085,000, you are correct. Ding! Ding! Ding! You have a pretty good understanding of net worth. The life insurance only counts towards their net worth after they die.
Net worth is a simple concept, but it’s one you should know. The exact number isn’t critical, but it helps you to know roughly where you stand financially — especially if you plan to run for president someday. Give or take a few billion.