Personal Net Worth 101: Assets vs. Liabilities
Is your balance sheet a net negative or positive? To figure that out, you need to know your assets from your liabilities.
March 23, 2022
If you’re curious about what you’re worth financially, it’s wise to weigh your assets vs. liabilities. Individuals, businesses and even countries follow the same basic process to figure out their net worth, and you don’t need to be an accountant to understand the basics.
However, depending on the complexity of your financial situation, the calculations might not be as black-and-white as you’d expect.
To help you gain some clarity, keep reading to learn the definitions of assets and liabilities, a few examples of each and how you can use all this info to calculate your net worth and reduce your liabilities.
Assets vs. liabilities: What’s the difference between them?
At a surface level, the question above is simple enough to answer.
An asset is something you own that has value, meaning it positively impacts your net worth. This includes anything that provides cash flow or will do so in the future (known as future economic benefit), like investments and savings, an NFT or your 401(k).
A liability is a debt and has a negative impact on your net worth. Examples of liabilities include credit card debt, personal loans and even income tax, as it’s money you owe the government.
While the above definitions will give you a basic understanding of assets vs. liabilities, there are also different types of assets and liabilities.
For instance, assets can be either tangible or intangible and short term or long term:
Tangible assets: These are physical and easily quantifiable assets. Your more liquid assets — like cash and stocks — as well as real estate you own fall into this category.
Intangible assets: These assets are anything that offers value yet lacks physical properties. Examples of intangible assets include intellectual property or your social media pages if you’re an influencer.
Short-term assets: These are assets with significant liquidity that will become cash in under a year, such as a certificate of deposit that will soon mature.
Long-term assets: These are assets that won’t become cash for much longer, such as a retirement account, like a 401(k), that you won’t be dipping into for another 20 years.
As with assets, there are different types of liabilities, including:
Short-term liabilities: Also known as current liabilities, these are short-term loans or other debts that will be due within the next year.
Long-term liabilities: Also known as non-current liabilities, these are long-term debts, such as bank loans.
Other things to keep in mind
There are some things, like real estate, that can be a gray area when it comes to determining your assets and liabilities.
For example, your house is an asset, since it’s an investment and offers tangible value. Yet the vast majority of people have to take out a mortgage to buy a house.
The mortgage you have on your house is a liability. This means some of the value of your home is offset by what you still owe on the house.
Owning a house also means you face other expenses, such as maintenance costs, insurance and property taxes. So, even if you’ve paid off your mortgage completely, your house may still have liabilities associated with it.
Another factor to keep in mind is depreciation. As they say, a car loses value as soon as you drive it off the lot. So, while your car itself is an asset you can sell and make money from, it likely isn’t worth what you paid for it. Plus, if you financed it, your auto loan is a liability that will offset the car’s value.
Finally, know that the value of assets can change. For example, your house probably has a different value now than when you first bought it — and there’s no surefire way to know how an asset’s value will change over time.
How to calculate your net worth
Calculating your net worth is easier than you might think: Add up your total assets and subtract your total liabilities.
The simplest way to do this is to:
Take a piece of paper or open up a spreadsheet.
List your assets and their values on the left side.
List your liabilities and their values on the right side.
Total each column and calculate the difference.
For example, if you have $750,000 in assets and $400,000 in liabilities, your net worth would be $350,000.
Keep in mind, however, this isn’t a one-time calculation and will be a part of your ongoing bookkeeping. As mentioned above, asset values can change over a period of time. Plus, as you pay off your debts, your net worth can grow.
In order to keep track of your net worth and other financial metrics, you may want to treat your finances like a business owner would — creating financial statements for yourself that help you get a bird’s eye view of your financial health.
You can make your personal financial reporting as simple or as detailed as you choose. You may decide to update a financial plan spreadsheet on a monthly, quarterly or even annual basis. You may also choose to include an income statement, cash flow statement or balance sheet in your financial plan.
How to lower your liabilities to increase your net worth
Once you understand the difference between assets and liabilities, you can use that knowledge to boost your net worth. This is about far more than just a vanity metric — a high net worth demonstrates financial health and makes it easier to protect your loved ones.
There are two ways to boost your net worth:
Increase your assets
Reduce your liabilities
Although you may be able to acquire more assets by earning more, the results of your hard work will be limited if you’re losing a large chunk of that money to debt payments.
If you’re paying $300 a month toward your liabilities, that’s $300 less you could be investing into growing your assets and net worth.
So, let’s focus on increasing your net worth by reducing your liabilities.
Which liabilities should you tackle first?
Your largest liabilities are likely auto loans, mortgages or credit card debt.
Since mortgage and auto loan amounts are often significant, it can be tempting to try to prioritize them over smaller debts, like credit cards. Mortgages and auto loans are tied to assets (your house and your car), so you could argue that there’s an upside behind that type of debt.
However, credit card debt is simply a liability that’s eating into your monthly discretionary income and net worth. For this reason, you’ll likely want to tackle your credit card debt first and keep making monthly payments on your car or mortgage.
Another factor to consider is the interest rate you’re paying. The average 30-year fixed mortgage rate in the U.S. is around 4.1%, while the APR for a credit card is typically between about 15% and 23%. A higher rate means higher monthly payments, which creates a greater liability. Plus, with credit cards, you’ll pay interest on top of interest, increasing the liability even further.
How to combat credit card debt
If you have multiple credit cards, it can be overwhelming to figure out which one to tackle first. The same principle applies here — prioritize whichever credit card has the highest APR to reduce the amount you’re paying in interest each month. This is known as the debt avalanche method. However, it’s smart to still make your minimum payments for all your other credit cards.
At this point, you might be thinking you don’t even have enough money to pay your monthly bills, let alone make extra payments toward your debt. In that case, it’s time to start budgeting and tracking your spending. There are plenty of apps that can help you do this, but a simple spreadsheet will also work well.
If you really don’t have the spare money needed to tackle your liabilities, you may want to think about increasing your income instead. Could you ask for a raise or apply for a better-paying job? Possibly start a side hustle? Earning a few hundred dollars more a month can help you pay off your liabilities.
You may even be able to directly reduce your APR and monthly payments by negotiating with your credit card provider. Alternatively, you could apply for a balance transfer, which moves your current credit card debt to another lender that offers a lower rate or a 0% APR introductory offer.
Another solution is to use the Tally† credit card payoff app. If you qualify, Tally will pay off your credit cards with a lower-interest line of credit. This will consolidate all your credit card bills into one monthly bill, so you can stop juggling multiple due dates and interest rates.
There’s nothing wrong with having some liabilities — it’s a part of life. Just try to ensure they don’t get out of hand (especially when it comes to credit card debt).
Aim for a positive net worth
Having a mixture of assets and liabilities is inevitable, but understanding how they differ and impact your net worth is something many people overlook. If you follow the steps outlined above to tackle your more significant liabilities, you’ll be well on your way to a positive net worth and a solid financial future.
Has this article served as a wake-up call about your liabilities? If so, not all is lost. You can use the Tally† credit card repayment app to start paying off your debt. The Tally app consolidates your higher-interest credit card debt into one lower-interest line of credit.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.