Assets That Increase Your Net Worth

Cars. A home. A rental property. Fine jewelry. Investments. An art collection. These are all assets that can increase your net worth.

Calculating your net worth can provide you with a personal financial report card for how you are doing at any point in your life, especially since net worth fluctuates throughout your adult life, according to changes in your income, your saving and spending habits, and your family responsibilities.

Which assets contribute most to your net worth, and how can you capitalize on them to increase it? One strategy is to calculate your net worth regularly and track it over time. You'll see trends in your financial situation, which can help you make better financial decisions and figure out what you need to do to reach your short-term and long-term financial goals.

Understanding Net Worth

Net worth is the difference between your assets and liabilities, calculated as:

Net Worth = Total Assets - Total Liabilities

Your liabilities are easy to quantify. You probably receive a reminder each month that states the exact amount of money you owe to each creditor.

It can be more challenging to determine accurate values for some of your assets. It is best to make conservative estimates to avoid inflating your net worth and giving yourself a false sense of financial security.

Your home is likely your most valuable asset, and the value that you assign to it will have a great impact on your net worth calculation. A qualified real estate professional can give you an estimate of your home's value, or you can research online real estate aggregators such as Trulia or Zillow. Look at the sales prices for recently sold, similar properties in your area. To be realistic, subtract the going commission, about 5%, to cover the future cost of selling the home.

Valuing Your Possessions

When in doubt, be honest and conservative in estimating the market value of any of your assets—including your home, vehicles, collectibles, furnishings, and jewelry. Be realistic about the condition of each asset and try to base your figures on what you could sell each one for now, rather than basing them on:

• How much you paid for an asset
• How much you wish it were worth

While any asset can boost your net worth, several large assets are likely to have a greater positive effect on your bottom line. These include your primary residence, vacation homes, rental properties, investments, and collectibles.

Your Primary Residence

Your house is probably the asset that has the most value, and it may simultaneously be your biggest liability. The more equity you have in your home, the more it will increase your net worth.

Keep in mind that when you determine your net worth, you must subtract your liabilities—including your mortgage. If your home is valued at $300,000 and you owe $200,000 on your mortgage, your home will effectively add $100,000 to your net worth ($300,000 - $200,000 = $100,000 equity). If you owe only $50,000 on that same home, the house will add $250,000 to your net worth ($300,000 - $50,000).

There is some controversy over the appropriateness of including your home in your net worth calculation. Proponents believe that your home is your most valuable asset and should be included. Opponents argue that your home is not part of your net worth because you're living in it rather than realizing its cash value, and even if you sold it you would have to replace it.

To appease both schools of thought, some individuals choose to create two net worth statements: one that includes the house, as both an asset and a liability if there is a mortgage, and one that leaves it out as an asset while still including it on the liability side of the equation if there is a mortgage.

Vacation Homes and Rental Properties

Second homes or rental properties can contribute substantially to net worth, ironically because they tend to be less expensive than primary homes. Buyers often pay all cash or take on a relatively small mortgage. If you rent out the property, it can even add a steady source of income on the plus side.

You won't have that income if you plan to use the property exclusively, but your net worth can still increase over time as you build equity in the home and, hopefully, it appreciates in value.

Because you will still have a place to live if you sell your vacation home or rental property, you can safely count it as an asset without worrying about the don't-count-your-home-as-an-asset school of thought.

Investments

The value of your investments in any tax-deferred retirement plan such as a 401(k), 403(b), or individual retirement account (IRA) can significantly increase your net worth over time.

Any other savings or investment accounts go on the plus side as well.

Most investments fluctuate in value over time, so it is important to reflect these changes in your periodic net worth calculations.

To provide a realistic view of your financial situation, include taxes on these assets, which are contingent liabilities, on the liability side of your net worth statement.

Art and Other Collectibles

The value of art and collectibles is fickle, to say the least, and can also be hard to pin down.

If you own art or collectibles that may be valuable, it pays to seek professional appraisals. In fact, getting a new appraisal every few years is a good idea since values can change so radically.

The appraisal also will alert you to the need for adequate insurance against losses. Your homeowner's insurance policy, for example, may not cover art and other collectibles without a specific rider.

The Bottom Line

Your net worth is simply the sum total of all of your assets minus your liabilities. It's a useful figure to know. It's even more useful to track it from year to year to see whether you're on the road to achieving your long-term financial goals.