3) Net Worth Activity |
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Objective: Build a Net Worth statement - an indicator of your personal wealth.
About Net Worth
Net Worth is an indicator of your personal wealth. If you are looking to your future, you can watch the change in your Net Worth as a mark of progress towards your future goals. But, what is Net Worth? To answer that question, you have to understand assets and liabilities.
Assets
An asset is an item of economic value, which you own, and which is cash or could be sold for cash. It is important to distinguish between an item of economic value and an item that may only have sentimental value. The financial value of an asset is the amount the asset could be sold for today, it is not what you may have originally paid for the asset. While something may be emotionally important to you, if no one will buy it, then it is said to have no cash value and is not considered an asset.
Liabilities
A liability is a debt — money or equivalent monetary value of things that you owe someone else. You have liabilities to your telephone company for using their service. You may have credit card bills, a mortgage, a car loan, or other types of borrowings or payments due. The amount of a liability is what you owe as of today, not the original amount, or last month’s bills. For a loan, the liability is the total amount of the principal that is still owing, plus any past interest that has not been paid, future interest is excluded.
Net Worth (Equity)
Net Worth, also called equity, is the total worth of the things you own (your assets) minus all your debts (your liabilities). Or, you can think of it as the amount you would have left over if you sold all your assets and paid off every single one of your debts today. If the number is positive and growing, that is good. If your net worth is negative and shrinking, you may be in financial trouble. Here is the formula ...
Net Worth is an indicator of your personal wealth. If you are looking to your future, you can watch the change in your Net Worth as a mark of progress towards your future goals. But, what is Net Worth? To answer that question, you have to understand assets and liabilities.
Assets
An asset is an item of economic value, which you own, and which is cash or could be sold for cash. It is important to distinguish between an item of economic value and an item that may only have sentimental value. The financial value of an asset is the amount the asset could be sold for today, it is not what you may have originally paid for the asset. While something may be emotionally important to you, if no one will buy it, then it is said to have no cash value and is not considered an asset.
Liabilities
A liability is a debt — money or equivalent monetary value of things that you owe someone else. You have liabilities to your telephone company for using their service. You may have credit card bills, a mortgage, a car loan, or other types of borrowings or payments due. The amount of a liability is what you owe as of today, not the original amount, or last month’s bills. For a loan, the liability is the total amount of the principal that is still owing, plus any past interest that has not been paid, future interest is excluded.
Net Worth (Equity)
Net Worth, also called equity, is the total worth of the things you own (your assets) minus all your debts (your liabilities). Or, you can think of it as the amount you would have left over if you sold all your assets and paid off every single one of your debts today. If the number is positive and growing, that is good. If your net worth is negative and shrinking, you may be in financial trouble. Here is the formula ...
Net Worth = Assets — Liabilities
To determine your Net Worth, make a list of all your assets and liabilities. Then subtract the liabilities from your assets.
Here is an example of a net worth calculation:
Here is an example of a net worth calculation:
Note that your Net Worth is just a snapshot of today’s values. It does not include money you might make in the future, such as salary from your job, or an inheritance, or increases in the value of your assets. Nor does it include future loans and expenses due. All these future events are uncertain or unknown today.
How to Play
How to Play
- Under ASSETS, click ADD MORE and enter the description and amount of an item you want to add. Repeat this step to add all ASSETS. Click the trash can to remove an item.
- Under LIABILITIES, click ADD MORE and enter the description and amount of an item you want to add. Repeat this step to add all LIABILITIES. Click the trash can to remove an item.
- NET WORTH is automatically calculated based on ASSETS minus LIABILITIES.
- Use the PRINT button to print to paper or save as an electronic file (pdf). Write your name down on the printout if you will be submitting to an instructor.
- Use the RESET button to erase your data or start over.
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PRACTICE
Click the PLAY ACTIVITY button below to do the activity for MO and then for yourself. Mo Money Play this activity to determine the Net Worth for Mo Money, based on his current assets and liabilities. For simplicity, use the Asset values provided in the profile and do not try to estimate the value of what the asset could be sold for. Review the MO MONEY PROFILE YOUR TURN! Complete your own Net Worth statement. |