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Calculating net worth has become an obsession with many people over the years. They want to know what happens if the world comes to an end and they have to sell all they’ve got to move into a cave in New Mexico.
The thought of chucking it all and disappearing has a certain amount of appeal. Taking you entire life’s savings and then vanishing has been the stuff of many a great movies (think The Thomas Crown Affair, Wild Things, and just about every spy movie ever produced).
The more practical application of this calculation is either a) when one becomes unemployed or retires, how much stuff do they have to continue living b) when determining who gets what in the event the reaper comes knocking?
In its most basic format, net worth is simply all of your assets less all of your debt. This is pretty simple right? Wait, not so fast. There are actually at least three types of net worth (or variations thereof): 1) Liquid Net Worth 2) Retirement Net Worth and 3) Full Net Worth.
Liquid Net Worth
This is the “I’m going to make a break for it” net worth calculation. Liquid Net Worth is defined as all of your readily available cash plus everything you can sell in a very short period of time (say within a few days), less the debt that you owe. Don’t forget to deduct any early access penalties that you would realize from the sale of your assets – this is particularly true of IRAs, and 401ks which charge steep fees for early payment.
Retirement Net Worth
This is the one most people think about when they think about Net Worth. How much am I going to be worth in retirement or if I have to have an orderly sell off of my personal assets. This version of net worth assumes that you will not pay any penalties for breaking into your IRA or 401K because you will be of age to start making withdrawals. It is effectively you Liquid Net Worth plus the full value of your retirement assets and real estate – remember you have time in retirement so if it takes a few months to sell your house, that’s ok.
Full Net Worth
There is one more level of net worth. This level includes retirement net worth plus the most valuable asset of all – your ability to earn in the future. While you can’t sell off this asset in whole to someone else, you can rent it over the years to come.
This last net worth element is where you can make a monumental difference in your quality of life now and the future. Working on honing your earnings ability, through new skills, certificates, degrees, or even new business ideas, will allow you to add to the other two net worth categories nicely!