- Assets are the things you own like your house and car.
- Liabilities are the things you owe like your mortgage and student loans.
- Net worth is the difference between assets and liabilities.
Several years ago, my boss, the owner of a large regional bank, asked me to lead a presentation in front of more than 160 women about financial wellbeing. The first thing I had in my notes was to show them how to calculate net worth in relation to their assets and liabilities but I was so nervous that when I saw all their faces in front of me, I went blank. Luckily, I knew this may happen and memorized an acronym called FISH (explained at the end) and that’s what saved my presentation on net worth.
FISH stands for: "Financial, Intellectual, Social and Human," and is a holistic way of measuring your net worth. It's one of three we'll go through in this article. First, let's review the basics of the relationship between assets and liabilities in relation to networth below.
What's the relationship between assets, liabilities and net worth?
In simple terms, net worth is the difference between your assets and your liabilities. Assets are all the things you own such as a house, investments accounts, cars. Liabilities being all the things you owe, such as a mortgage, credit cards, student loans, etc.
For example, if all you own is a $200,000 house and only owe $50,000 in mortgage ($200,000- $50,000) your net worth will be $150,000. Knowing your net worth is a good indicator of your financial wellbeing and as Peter Drucker, known as "the man who invented management, said: “You can’t improve what you don’t measure.”
So let’s review three different ways you can measure your net worth.
The traditional method
Most net worth statements are calculated on a balance sheet where assets go on top and liabilities in the bottom, each are separated in different categories in horizontal columns. The beauty of making your own is that you can use any scale you want. For example, I list them in liquidity order.
Retirement accounts (401K, IRA, Roth, etc)
Personal assets (Auto, house, furniture, etc)
Business assets (Investment properties, inventory, Royalties)
For liabilities, I recommend the same way: first short-term debt, such as credit cards, then student loans, and finally business and mortgage loans. The idea is to update this at least once a year and set goals related to growing your assets and reducing your liabilities.
The key to having a healthy ratio between assets and liabilities is to focus on assets being at least two times more than your liabilities. This ratio will depend on your age and the type of assets and liabilities you have.
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Younger individuals should focus more on income generation and asset growth with liabilities (because income will lead to the accumulation of assets later in life). Older individuals should focus on assets free of liabilities to generate income as they get ready to retire.
The family method
In this case, you can add vertical columns to your balance sheet and list the assets and liabilities of your partner or spouse. This way you know how much you have in your name, their name and joint names.
This exercise is good for estate planning and to consolidate family assets in one place.
I often use this method to start the financial planning process. I remember the first time I used it: An HR manager asked me how much she needed to save for her retirement. I proceeded to ask her three questions:
How much does she want at retirement?
How much she does she have now for retirement?
What assets does she have and must contribute to reach this goal?
I explained to her that it was like making a pie: First take inventory of the ingredients that you have at home and then solve for what you need to get. Using this approach, if she wanted $500,000 in retirement funds and had $100,000 in already saved and $250,000 in other assets including her partner’s accounts, then she would only need to solve for $150,000 ($500,000-$100,000-$250,000).
If you are curious if you net worth is high or low, visit the Federal Reserve to see how you compare.
The holistic method
My New York City presentation started with “Your net worth is more than just a number.” It’s built from four capitals: Financial, Intellectual, Social and Human (FISH).”
It was first mentioned by one of my favorite authors, Jay Hughes, who wrote "Family Wealth: Keeping It in the Family."
The idea is that money is not enough to measure our net worth. We must also contribute intellectually, socially and as human beings.
Financial capital is easy to explain since it is a list of your assets minus your liabilities. It is your money.
Intellectual capital is what you feed your brain and the sum of your knowledge, education and teachings. It's not easy to measure, but you can try using a scale of 1 to 10 in terms of where you want to be.
Social capital refers to the impact you have in the community and the world. It is about finding the area where you want to contribute and the sum of contributions in any currency of your choosing: Time, money, or knowledge.
Human capital is defined as thriving and communicating with your own family and staying productive and growing. As an example, let’s look at Mary, whose financial capital is $150,000 (home value minus her mortgage) and her goal is $500,000. She gave herself a 3/10, intellectual capital is a 5/10 since she still wants to do her masters and is in the middle of her career. In terms of social capital, she contributes her time and a percentage to the animal shelter but would like to create workshops to become a true advocate. She gives herself a 7/10. Finally, for her human capital, since she is a little distanced from her family and working on reconciliation, she gives herself a 6/10.
Give those a try and see what works for you–it may be that all three bring you enlightenment.