Can someone please help me with this problem? I would really appreciate the help!

Question

Question:

How do you determine your net worth?

Options:

Liabilities divided by assets

Assets minus liabilities

Assets times liabilities

Assets times assets

Liabilities minus assets

This is what is says in my book, but I’m clueless as to what it means: “It is simply assets versus liabilities.”

Answer 1

The answer would simply just be your total assets minus liabilities.

1. To put things into perspective, assume your assets consist of how much cash you have in your checking/savings account, your 401k and your personal investment portfolio.
2. Assume your liabilities include all of your outstanding debt (credit card balance, personal loans, etc.)

Your net worth is simply just the total of your assets minus liabilities.

If you own a home or a car with a loan, this is a bit different. Lets say you bought a car for $50k and borrowed $40k for an auto loan. 2 years later you learn the fair market value of your car (what it can be sold for) is $40k and your auto loan has been paid down to $20k. You cannot say that you have assets of $40k in this scenario because you net to subtract out the debt associated with that asset (in this case, you have equity value of $20k that would increase your net worth). The same concept applies to owning a home and having a mortgage.