What is your Net Worth and How DO you Calculate It?
How do you calculate your net worth? Why is your net worth important to know?
Net worth is an individual’s total assets minus total liabilities. It reveals your financial health by showing your current financial position. Tracking your net worth can help you manage your money and stay financially secure. Many people calculate and monitor their net worth to understand their financial situation. Net worth can be tracked as an individual or as a household. Most banks use their client’s total net worth as a consideration when determining if they can issue them a loan. If you are seeking to apply for a loan in the near future, it is a good idea to have an understanding of what your net worth is ahead of time. If you have more liabilities than assets (i.e. you owe more than you own), then your net worth will be negative. Maintaining a positive net worth is essential for achieving financial success.
To calculate your net worth, subtract all of your personal debt from your total assets. An asset is anything that has value; examples are cash, stocks and jewelry. A liability is an amount of money you owe including student loans, unsecured loans, credit card debt etc.; personal debt is when you borrow money from banks or other lenders. Mortgages and car loans are two common types of personal debt. Typically, if you have a large amount of liabilities then the lower your net worth will be.
To maintain or increase your net worth, you must add to your assets or reduce your liabilities by an equal amount. If you have ever read the book Rich Dad Poor Dad , the author speaks at great length about the key to financial security is to increase your assets. The net worth calculation is a good demonstration of why. You must ensure your liabilities are not increasing at the same rate as your assets and that the assets you acquire are not losing value.
You can also increase your assets by saving money or investing wisely, keeping in mind that assets that increase in value over time will boost your net worth as well. This includes investments like Unit Trusts or Mutual Funds which can increase due to growth in value of the underlying stocks, bonds or other assets that make up the asset base, such as real estate and precious metals.
It’s important to calculate and maintain your net worth so you can accurately track your financial progress. Calculating and monitoring your net worth helps you stay on track with your financial goals. Maintaining a positive net worth is essential for achieving financial security- it keeps you from getting into financial trouble when pursuing financial dreams such as buying a house or start a business venture. As I always say, if you don’t know where you are coming from, you can’t know where you’re going.
Check on your financial health today by accessing my net worth calculator here or at financialcentsibility.com/calculators . The net worth calculator is a great tool to help you understand what your net worth is and better manage it. You’ll have access to calculate your current net worth, and input different variations and scenarios of how much you could be worth with different investment strategies.