If you’re still nursing a 2013 money hangover, the New Year is the ideal time to take stock of your overall financial health.
One of the single best indicators of your financial condition is a calculation known as your net worth, which aims to provide you a broad picture of your finances by tallying your total assets minus total debts.
(If you use Mint.com, this number can be easily found on the left-hand column of your home page.)
But understanding what your net worth is really about can be a bit difficult, so we’ve created this quiz to help you flex your net worth IQ.
Question 1: What counts as an asset?
A: Your car
B: Your engagement ring
C: Your investment portfolio
D: Your emergency savings
E: All of the above
The correct answer is E (all of the above). For the purposes of net worth calculations, all of your assets should be included, including physical assets (jewelry, vehicles, homes) and non-tangible asssets (investments, savings accounts, etc).
Question 2: Joey has a 401(k) retirement account, which he can’t touch without penalty until he reaches the age of 59.5. Does this count as an asset?
A: No, since he can’t use it until well into the future.
B: Yes, since it’s still an asset.
C: It depends on when he intends on using it.
D: None of the above.
The correct answer is B. A retirement account is an asset which should be included in your net worth – even if you don’t intend on touching it for decades.
Question 3: Lauren has been very prudent with loans, only taking out “good” debt to finance her graduate education. Should student loans be counted in her net worth?
A: Yes, but she should subtract the amount she intends on paying off this year.
B: No, since student loans are good debt that will help her build her finances in the future.
C: No, since she can defer the loans or put them on a slower payment plan if she faces financial difficulty.
D: Yes, since student loans are still debt.
The correct answer is D. Even so-called “good” debt is debt, no matter if you intend on deferring it or if it’ll help you land a high-paying job, so you should include it in your net worth calculation.
Question 4: Carl has a negative net worth. What is the best way to improve it?
A: Save more money.
B: Pay off debt.
C: Increase the value of his investments.
D: See his home increase in value.
E: Any or all of the above.
The correct answer is E. Any or all of these solutions could either increase his assets or decrease his debt, thereby pulling his net worth out of the red.
BONUS Question 5: Calculate Maria’s net worth, assuming the following:
- Maria has a $5,000 emergency savings account.
- She owns a car worth $10,000.
- She owes $20,000 in student loans.
- She has $25,000 in a 401(k) plan.
- Her home is worth $200,000, but she still owes $100,000 on the mortgage.
Answer: First, total all of Maria’s assets. In this case, it’s $5,000 emergency savings + a $10,000 car + $25,000 401(k) + $200,000 home = $240,000. Then, subtract her debt. $240,000 -$100,000 mortgage balance- $20,000 student loans = $120,000 net worth.
So, how’d you do?
Remember that although net worth is one of the best ways to take stock of your finances, it’s not a complete picture.
If you have a low net worth due to student loans, but just started a higher-paying job, for example, the number may increase quickly.
Or, your net worth may seem high, but be mostly due to your home’s value.
The trend is more important, and a better indicator of whether you’re actually improving your financial situation over time (Mint.com’s aptly named “trends” tab can help you see this in a jiffy).
So long as your financial plans lead to a growing net worth over time, you’re on the right track.
Janet Al-Saad is the founder of the Five Ten Twenty Club, a website designed to help you improve your finances $5, $10 or $20 at a time.