Suze Orman Has This Cautionary Advice About Your Net Worth

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Are you in the black or in the red? 

If you’re not rich (and let’s face it, most of us aren’t!), you may not think you have a net worth or that it’s worthwhile to know that number. On the contrary, calculating your net worth is a way to see your own personal finance “big picture.” Let’s take a look at how you can find out your own net worth, why it matters, and why one financial guru warns Americans to be careful when it comes to figuring out that magic number.

The net worth formula

Your net worth equals what you own that has cash value, less what you owe to creditors. In other words, assets minus liabilities.

Your assets may include a wide range of property value, cash, and investments. If you own a home, look at how much you owe on the mortgage loan versus the property’s market value. For example, if your home is worth $300,000 and you have $240,000 left on the mortgage, your home is adding $60,000 to your net worth. Check out how much money you have in your bank accounts; that cash is an asset. If you have $50,000 in your IRA account or 401(k) plan, that’s an asset, too.

The less fun part of net worth math is looking at your liabilities. This is the money you owe others, often creditors. Going back to your mortgage, if you still owe $240,000 on it, that’s a liability. If you owe money on your credit cards, same thing. Got a personal loan you’re paying off? Bingo.

Once you’ve got both numbers, subtract your liabilities from your assets. Don’t be discouraged if the number isn’t as high as you might hope, or if you’re in the negative. Many people are, and your net worth will fluctuate over time. As you get older, it will likely trend upward as you grow your earning potential and pay down debts, like that mortgage loan. You might also be able to put more money aside in your savings account and increase your contributions to your retirement accounts.

There is one potential pitfall of basing the bulk of your net worth on one or two major assets, though.

A cautionary tale about net worth

Financial guru Suze Orman had some wise words about net worth in a recent episode of her podcast, noting that “if you calculate it incorrectly, you could end up in a whole lot of trouble.” Orman had some recent examples from listeners to illustrate this point.

She received an email from a couple who own their home outright and had counted the value of the house among their assets to become part of their net worth. Unfortunately, they live in Ohio and have been impacted by the recent train derailment disaster from earlier this year. Thanks to this unforeseeable event, the home is now basically worthless, and the couple’s plan to sell it and move elsewhere for retirement is in shambles. They’ll have to wait (and no one knows for how long) to see what happens with various legal actions to help the people of East Palestine.

Orman discussed other followers who are facing the loss of homes due to extreme weather as well. The upshot is that anything can happen to your home at any time, and the only way to protect yourself is to make sure you have the right homeowners insurance coverage. In some cases, you’ll know ahead of time that your home is in an area prone to weather events like hurricanes or wildfires. But for the couple from Ohio, there was no way to know that a toxic chemical spill from a rail disaster would ruin their plans to sell their home and move someday.

Diversify your assets

Ultimately, per Orman, the best way to ensure that your net worth isn’t lost in such a quick and devastating fashion is to diversify. It’s okay to count your home equity among your assets, but make sure it’s not your only one.

Orman is a big fan of government bonds; you could put your cash into those, as well as certificates of deposit (CDs), a money market account, and even a trusty high-yield savings account. Your money should be safe in all of these as long as you’re within FDIC limits, and keeping your cash protected in this way can give you more peace of mind that you won’t be out of options if something happens to your home.

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