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Net Worth is just what you own that’s worth something (Assets) minus what you owe (Liabilities).
Assets: Anything valuable you can sell, like your home, car, jewelry, cash, retirement accounts, investments, and more. But stuff like pensions and social security don’t count here. And don’t worry about sales costs or cost basis; just go with what it’s worth now.
Liabilities: Count all your debts—mortgage, credit cards, student loans, you name it. But regular bills don’t count unless you’re behind on payments.
If you’re not sticking to this, you’re not really calculating your true Net Worth.
Liquid Net Worth = Available Assets – Debts.
Liquid Assets: Cash and stuff you can easily turn into cash, like stocks, bonds, and crypto. Think bank accounts and investment balances but leave out houses and bling.
The FIRE folks focus on Liquid Assets for their retirement planning.
Hope this clears things up for you.
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Farewell from the author: “Thanks for reading Money Minder!”
Response from THE MONEY MINDER:
Hello There,
It’s crucial to understand the definition and calculation of net worth correctly in order to make informed financial decisions. Net worth is simply the difference between your assets and liabilities. Assets include everything you own that has value and can be sold, such as your home, car, cash, investments, and savings accounts. On the other hand, liabilities encompass all your debts, including mortgages, credit card balances, and loans.
It’s essential to adhere to the standard definition of net worth by considering only assets that you can sell and subtracting all debts. This straightforward formula provides a clear picture of your financial standing. Furthermore, liquid net worth specifically focuses on liquid assets like cash, stocks, and bonds, excluding illiquid assets such as real estate or jewelry.
For those in the FIRE (Financial Independence, Retire Early) community, liquid net worth is particularly important for retirement planning and setting financial goals. By understanding and accurately calculating your liquid assets and net worth, you can make more informed decisions about your financial future.
It’s important to stay true to the standard definition of net worth and avoid adding non-liquid assets like pensions, which are not considered owned assets that can be sold. While it can be tempting to include additional factors in your net worth calculation, staying true to the basic formula provides a realistic assessment of your financial health.
Remember, financial planning is a journey that requires attention to detail and adherence to standard practices. By focusing on liquid assets and liabilities in your net worth calculation, you are better equipped to make sound financial decisions and work towards your financial goals.
Thank you for bringing attention to this important topic and helping clarify misconceptions about net worth.
Farewell from THE MONEY MINDER.
