Ask three friends what counts toward their net worth and you may get three different answers. One includes the car, another leaves out the pension and a third forgets the credit card. If you want an accurate number, you need to decide what is included. This checklist answers the question what is included in networth, with special attention to the grey areas that cause most of the confusion.
The basic rule
Net worth counts what you own that has a market value (assets) and subtracts what you owe (liabilities). If it can be sold or turned into money and you hold legal title, it is an asset. If you are obliged to pay it back, it is a liability.
What is included in networth? Things that are clearly included
Assets
- Cash and bank balances: current accounts, savings, cash held at home.
- Investments: shares, funds, bonds and other securities, at today’s market price.
- Retirement accounts: pensions, 401(k)s, IRAs and similar plans, at their current balance.
- Your home and other property, at realistic market value.
- Ownership in a business, valued sensibly.
- Vehicles, at what a used-car buyer would pay.
- Valuable items: jewellery, art and collectibles that could be sold at a known price.
Liabilities
- Mortgages and home-equity loans.
- Student loans.
- Car loans and personal loans.
- Credit-card and store-card balances.
- Taxes owed and other bills overdue.
- Money borrowed from relatives, if it must be repaid.
The grey areas
Pensions
A pension you are contributing to is an asset, and the balance of a defined-contribution plan is easy to include. A traditional defined-benefit pension, which pays a set income in retirement, is trickier. Some people include an estimated lump-sum value, others leave it out and treat it as future income. Whichever approach you pick, use it consistently so your trend is meaningful.
Life insurance
Term insurance has no cash value and should not be counted. Whole-life or universal policies that build cash value can be included at the surrender value, which is the amount you would receive if you cashed in the policy. The death benefit is not part of your net worth while you are alive.
Vehicles and depreciating items
Cars lose value every year. Use a current resale estimate from a valuation guide, not the price you paid. Furniture, clothes and electronics usually have little resale value, and most people leave them out.
Cryptocurrency and other volatile assets
Count them at the current market price on the date you calculate, and be prepared for that part of the number to swing. Some people discount very volatile holdings to stay conservative.
Money owed to you
A loan to a friend is an asset only if it is realistic that you will be repaid. Otherwise, leave it out or reduce it.
Tax effects
Retirement accounts that have not yet been taxed will produce a tax bill when you withdraw. Some people reduce those balances by an estimated tax rate to see a more realistic spendable figure. Others use the full balance for simplicity. Choose one method and keep it consistent.
Things that should not be included
- Future income, such as expected salary or inheritance. These are not yet yours.
- Monthly bills not yet due, such as next month’s rent.
- The total price of a house you are still paying for. Include the value of the house as an asset and the mortgage balance as a liability, not just the monthly payment.
- Assets that belong to someone else, such as a company car owned by your employer.
- Wishes and hopes, such as the value you hope a business will reach.
Joint assets and household questions
If you share accounts or property with a partner, decide whether you are calculating personal or household net worth. For household net worth, include everything and all joint debts. For personal net worth, include your share, which is normally half unless you have a different legal split. Keep the same approach each time.
Frequently asked questions
Is my home included? Yes, at market value minus the mortgage balance.
Do I include a car I lease? Generally no, because you do not own it, although lease payments are obligations you may want to track separately.
What about a business I own? Yes, but value it carefully, because estimates for private businesses vary enormously.
Should I include a trust? If you are a beneficiary but cannot access the assets, many advisers leave it out until you have rights to it.
How to make it practical
1. Write down every account and asset with its current value. 2. Write down every debt with the current balance. 3. Mark the grey-area items and decide on a consistent rule. 4. Calculate, date and save the result. 5. Repeat every few months using the same rules.
A reminder about accuracy
A net worth figure is only as reliable as the valuations in it. Property and business values are estimates, and market prices change daily. Use ranges when you are unsure, and avoid fooling yourself with optimistic guesses. This is general information and not financial advice.
In short
When you ask what is included in networth, the answer is everything you own at realistic value minus everything you owe, with consistent treatment of grey areas such as pensions, insurance policies and cars. Keep your method the same over time, and the trend will tell you more than any single number.
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Image credit: Spotting973 via Wikimedia Commons (CC BY-SA 2.0).
