Is Net Worth Important? Ask Trump!

by Kevin on April 27, 2011

Here’s an odd tidbit: Donald Trump says his net worth is whatever he feels like. Normally I don’t write about news, but I find this very interesting considering Trump is considered a potential candidate for President. With a nation reeling in debt — currently $14.3 trillion, approximately — having a solid understanding of basic financial topics seems kind of important in a Presidential candidate.

To be clear and for the record, I’m not really a fan of either party. I think Ron Paul and Dennis Kucinich should run together since they both seem to see the issue with a lot of dumb spending my our government. I mention this so you can see I’m not dissecting Trump because I’m anti-Republican. I’m anti-dumb spending and financial ignorance.

Don’t get me wrong. I’m not in any way under the illusion that the President is directly responsible for gas prices or any other consumer “pain” issues that are brought up regularly in the media. The President sets the tone, and his branch of government has to work with the legislative branch to come up with policies and laws. (Oh, and the annual budget, something they’ve had problems handling recently…)

But net worth is still kind of significant. Trump actually sued the author of a book on him who claimed his net worth is only around $150 million to $200 million. Trump claims it is over $3 billion. Let’s define net worth and see where Trump might be getting tripped up.

What is Net Worth?

Your net worth is literally the net (or difference) between the assets (cash, house, cars, computers; anything of value) you own and your liabilities (what your owe: your mortgage, car loan, credit card debt, student loans, etc.).

It is a pretty simple equation. Add up the real market value* of everything you own that you could sell. Sticking to the major things you own is what is important. You might be able to sell that package of pens in the office closet, but 50 cents isn’t really going to help you here.

Once you’ve totaled up your assets, do the same for your debts. That should be easier because the real market value of what you is whatever the balance is on your loans. Login to your accounts or check your statement balances, then total everything up.

Then you simply subtract the debts from the assets.

You Want a Positive Number

When you do that basic subtraction, you really want the difference to be a positive number. Getting to the point of positive net worth, no matter how small, is a huge step in many people’s personal finance journey.

Why is it so important? Because it means you could sell everything you own, pay off all of your debts, and still have something left over.

It wouldn’t necessarily be pretty. You might have to sell that Benz you bought on a 7% car loan. You might have to sell all the furniture you financed for your mega home. You might even have to move out of your neighborhood and sell your house (if you could, in this real estate market).

But you would be ahead. You wouldn’t still be working to pay off debt. A positive net worth is a huge accomplishment.

Different Ways to Calculate

You noticed I added an asterisk (*) to “real market value” above. This is where things get a bit tricky, and supposedly this is at least a portion of what has Trump tripped up.

How could you claim to have a net worth in the billions when someone who has done their research says you’re only worth in the millions? If you held a lot of expensive real estate, but you thought it was worth more than it currently is, that might just happen.

As I’m sure you know, Trump has a lot of property assets. Some that he bought at a discount, some I’m sure he paid full price for. But property values change. Ask anyone who purchased a house 3-5 years ago and recently sold it. I’d bet a majority of those folks got less than what they paid for their home. (I know my wife and I did!)

But if you haven’t sold the property yet, does it really impact your net worth? Could you just value it at whatever you like?

I lean toward the idea that when you’re pricing your assets you price them at liquidation prices. You’ve seen the signs when stores close, right? It looks something like this:

Photo by Watt_Dabney via Flickr

Everything must go! Total liquidation sale!

They’re not getting full price for the items in the store. When you’re selling everything including the shelving, you’ll take whatever price you can get.

The same is true in an asset crunch. You’re selling items not what you think they’re worth, but for whatever price you can get for them. So even putting the price you paid for the real estate can be risky because those values can drop. Including appreciation of the price seems downright foolish because now you’re counting on the price going up to increase your net worth.

What do you think? Is net worth an important calculation? Does it even matter? Or are you more focused on piling up as much hard cash as you can?

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