Q. Net worth numbers are a subject I find difficult to define and understand. For example:

I am 45 years old. I have $100,000 invested in my own business, which cash flows $12,000 per month (pre-tax). It is a sales company and has no physical assets. What is it worth? Seven times cash flow? One times cash flow? Nothing? 

I own a home "worth" $330,000 (for which I owe $200,000); however what if I could only sell it for $300,000 (less the 6% commission, of course). What is it worth?

My personal property (cars, furniture, lawn equip, clothing, jewelry), at cost is "worth" $300,000. In the event of a fire, my insurance would replace "at cost", but should I sell unexpectedly do I value at garage sale or IRS (charity) rates. Again, what is it truly worth?

Lastly, I have $150,000 invested in mutual funds that have been "worth" $100,000 to $200,000 in the past year. How do you value their "worth"?

---M. P., by e-mail


A.  Your note reminds me of an old joke. At a cocktail party full of strangers, one person goes up to another, introduces himself, and asks, "And what do you do?"

The second person, not wanting to play the grown up version of "What Do People Do All Day?" answers:

"In the event of what?"

So it is with our net worth. It tends to expand when we talk to bankers about loans and it shrinks when we speak with divorce attorneys. Actual net worth is somewhere between the two. 

Figuring net worth has never been easy, particularly for illiquid assets like houses, cars, and personal possessions. The general formula is to calculate the reasonable value of any asset, net of selling costs. Then add all the assets and subtract the total of all debts. The result is your net worth.

The equity in your home is simple. Estimate its current market value in a quick (not panic) sale, subtract estimated selling costs, and subtract the related obligations--- mortgage, second mortgage, or home equity loan. The net is your equity in the home.

The value of your business is problematic since most valuations for small businesses are done on the basis of actual assets plus possible "goodwill"--- the amount over book value that a buyer would pay in order to start with a going concern. In a small business the goodwill tends to be ephemeral. You may be the source of all value in your business.

Your personal property is also problematic. The equity you have in your car is the wholesale value of the car less the balance on any car loan. Beyond that, personal property isn't worth much to sell or as collateral for a loan unless you have significant wealth. Then you can borrow against your Picassos, heirloom rugs, and sterling silver tea sets. Look around most homes, however, and few possessions have any market value--- though the objects may be useful to your heirs. As a general rule, you should value most "stuff" at yard sale prices.

The same applies to diamonds, jewelry, and fancy watches. The minute you buy them, they drop 50 percent in value. This includes collector items and antiques because the typical buyer will be a vendor. He will want to mark-up by 100 percent and resell it. That may seem extreme but remember he's not turning inventory the way Wal-Mart does.

The value of your mutual funds is what they are worth the day you are calculating your net worth. The value will be different in a day or a week but that's the best you can do.

When I think about my personal net worth I divide it into three categories:

•  Readily marketable and liquid financial assets,

•  Large household assets such as houses and cars,

•  And everything else.

When push comes to shove, the first category is what saves your bacon, the second category is your primary lever for reducing ongoing debt and expenses, and the last category is good for personal expression. Unless you are a rabid collector the odds are you won't be able to raise significant cash from your personal possessions.