What is my net worth? (part 2)
Determining Your Net Worth: Calculating Your Total Liabilities
Your Net Worth is simply the value of what you own (total assets) less what you owe (total liabilities).
The first step in calculating your net worth was to estimate the value of your total assets - which you should have done here. Next you have to estimate the value of your liabilities - which are of two types: short-term liabilities and long-term liabilities. For most people, both are fairly easy to calculate, and you can do this in the forms below.
Short-term liabilities are defined as all debts that have to be paid within the next 12 months. Typically, these might include credit card payments, short-term installment loans, personal loans, accrued income taxes, or borrowings on life insurance. Short-term liabilities also include whatever amounts of interest are due on long-term debts within the next 12 months.
Most long-term liabilities are incurred for the following purposes: to finance long-term investments like real estate, investments, or major personal assets like your residence or vacation property. Normally, the asset purchased constitutes security for the lender in case you default on your loan.
Over time, the value of the investment asset you purchased with borrowed funds may increase, while the amount of your obligation usually decreases. Thus, your equity - the difference between the current value of the asset and the current balance of the loan - usually increases.
Note: It is important to remember that there are circumstances where the value of an investment does not appreciate. For instance, depending on the price that you paid for your home or other investment asset, a downturn in the economy may find you owing more on the liability than the asset is worth. Therefore, the decision to borrow funds should be considered carefully, and based on your ability to finance both the interest and principal payments due on the loan over time.
You should now have an estimate of your net worth. However if having estimated your liabilities, you wish to re-adjust your asset calculation, you can return to the first part of this How-To Guide.