The news media has been making a lot of noise about personal net worth. CNN's Money website cited a report from the Federal Reserve Bank that revealed a 23 percent decline in family net worth between 2007 and 2009, while the website of the Omaha World-Herald pointed to another Federal Reserve report that showed family net worth rising by 4.7 percent in the first quarter of 2012. A lot of the change in your net worth can be attributed to the current value of your home, but not having a mortgage does not automatically mean you have a higher net worth. For example, if you use the money in your savings account to pay off your mortgage, you have fewer liabilities, but you also have fewer assets.
Your net worth represents a snapshot of your financial well being at a specific moment in time. It changes every time a financial transaction occurs, from getting your paycheck to paying your electric bill. In its simplest form your net worth is what's left over after you subtract all of your financial liabilities from your financial assets. Of course, when it comes to finances, few things are kept to their simplest form. Different financial institutions use various criteria for determining net worth, based on the reason the information is needed. For example, the government's First Application for Student Financial Aid program wants to know the net worth of a student's parents' investments, which includes their real estate, but does not include their home, while the CNNMoney net worth calculator includes the family's primary residence as an asset and the mortgage as a liability.
Determining Your Net Worth
There are plenty of net worth calculators available online, but you can create your own with a simple spreadsheet or with just a pencil and a sheet of paper. Make two columns. List the current market value of everything you own in one column, including all of your investments, bank accounts, retirement accounts, house and other real estate, and total them up. These are your assets. List the current pay-off amounts for all of your debt in another column, including car loans, student loans, credit cards, medical bills, mortgage and any other revolving debt. These are your liabilities. Subtract your total liabilities from your total assets. If the result is a positive number, you have a positive net worth. If the result is a negative number, you have a negative net worth. Having a positive net worth might help you obtain a loan when you need one and to get better credit terms, according to the Principal Financial Group.
A mortgage is a loan you take out to buy a house when you use the house as collateral. If you don't make your mortgage payments as agreed, the lender has the right to foreclose on your house and take possession of it. Traditional mortgage loans typically require at least a 20 percent down payment, although some lenders will accept a lower percentage if you agree to carry private mortgage insurance. Non-conventional loans, such as those made through the FHA or VA guarantee programs, allow down payments of 3 percent or less.
Assets, Liabilities and Equity
A house is an asset. Like any asset, its value can increase or decrease based on a variety of factors, including supply and demand, movements in the credit market, and improvements or perceived declines in the desirability of the neighborhood. A mortgage is a liability. The amount of that liability decreases each month as you make your mortgage payments. The difference between what your house is worth on the open market and the amount you owe on your mortgage is your equity. Not having a mortgage does not increase your net worth, but owning a home might. The value of homes has traditionally risen over longer periods of time, while the amount of your mortgage typically decreases, resulting in a higher equity and net worth. This is not always the case, as evidenced by the bursting of the real estate bubble in 2007.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.