Have you ever heard of wealthy people being described as ‘worth X (amount of dollars)’? Maybe, this celebrity is worth 5 million dollars, or that heir is worth 35 million dollars. This is called their net worth, and believe it or not, we all have one. Some people have a 0 net worth or a negative net worth, but it’s still their net worth. Knowing your net worth may be useful from time to time when filling out some financial forms or when planning your finances.
Your net worth is equal to your total assets minus your total liabilities.
To begin, add up all of your assets. You might be surprised at how many assets you have. The obvious are your house and investments including any retirement accounts such as a 401K or IRA, stocks, bonds, mutual funds, commodities, and real estate. Your vehicles are also assets, but make sure you only include their fair market value. In other words, if you were to sell them today, how much would you get? Some other assets include high valuables such as antiques, collectibles, and valuable art.
Next, you will need to calculate all your liabilities, or simple debt, money you owe.
This includes the amount you owe on your mortgage and vehicles, whatever you owe on items you financed such as computers and other high price items, credit card debt, student loans, and absolutely any other debt you owe. A liability means you are held liable to whoever you borrowed the money from. This money is not yours which is why it’s subtracted from your assets.
Finally, subtract. Assets minus liabilities equal equity.
In other words, subtract what you owe from what you have and you get what your worth, your net worth. Figuring out your net worth is a good way to see where you are in your life financially so you can set goals and make a plan of action. If your net worth is a negative number, this means you are in bad debt. Even if you get a number close to zero, you are still nowhere near where you should be for retirement. You can’t live off of social security alone unless you don’t mind downgrading how you are living now considerably.
Take your net worth as a starting point.
If you have a net worth of $100,000 or more and you are under 30, you have a good start. Keep saving and investing your money so that you are at least able to maintain your standard of living when you retire. If you have an equal net worth and you are much older, you may need to be a little more aggressive in your savings, but not so aggressive in your investments to avoid losing money. Let your net worth now be a starting point for the large nest egg in your future.
There are a number of ways. The most obvious is to transfer money held in your personal bank account into the new entity’s bank account. Initially, this is how every new mortgage company gets started.
Beyond that, you could sell equity in the company and bring on a new partner.
Your partner would have to buy shares in your corporation or a membership interest in your limited liability company, and the money from the sale of company stock or membership interests becomes part of the capital and net worth of the company.
Although it’s not easy, you may be able to find an investor willing to provide funding without giving up any equity in your business. Typically, this is a family member or a very good friend.
As you commence business operations, you can build net worth through retained earnings. Retained earnings are the profits your company makes that are not paid out to the owners of the company. To increase profits, increase your income (more closings or larger fees per closing) and/or decrease your expenses (go through each expense line-by-line and think of ways that each can be lowered). If the profits are kept in the company’s bank accounts or used to pay for company assets, they are counted as part of the company’s net worth.
Once you have been in business for awhile,
You can explore merging with another company whose assets combined with yours will meet the minimum net worth requirements typically required of a mortgage lender. When you are looking to merge with another company, you want to find a company whose strengths complement your strengths. Together, your company and the company you merge with are greater than your two companies individually.
Eventually your plan should be to generate higher earnings by acquiring weaker companies and loan originators displaced by competitors who could not survive in this business climate and were forced to close. Your company may then continue to increase in size as other competitive advantages become available to you as a larger company with increased production and profitability. Larger companies usually are stronger than smaller companies. They can offer more products, have offices in many locations to serve more borrowers, are licensed in more than one state, and have better management (which is how you became a bigger company).