Your net worth is the one number that can accurately reflect your financial life, and is not a measure of an individual’s salary, job title or the appearance of their car parked in the driveway; no matter how you feel about it, your net worth is the measure of your financial success.
Many individuals who earn a lot of money each pay period feel as though they are financially secure. Their ability to spend, however, does not equate to true wealth. They may spend their time constantly worrying about finances, while the person with a lower income may feel relaxed about their finances. When you compare their net worths, you can see why this difference exists. The net worth figures eliminate all of the distractions and focus solely on the amount you own compared to the amount you owe.
In essence, net worth is just a financial snapshot at a specific time. It does not equate to your emotional response; it is not a value judgement and it is not a reflection of how hard you work. It is just a mathematical calculation; total value of all assets minus total liabilities equals net worth.
Negative net worths are very common and happen to almost everyone when they first enter adulthood. This can happen when students have to borrow money (i.e. student loans), buy a new car and are paying a loan on it, and potentially using their credit card to buy purchases; because of all these obligations there is a serious chance that someone will have to spend more money on their bills than they do when making money, regardless of how much money they are making right now.
Net worth is calculated by compiling a list of each person’s current assets and a list of liabilities ( i.e. debts). Liabilities may include real estate mortgages, student loans, credit card balances, and personal loans, and therefore liabilities will never go away without making sure that each bill has been handled correctly.
In order to calculate an individual’s net worth, an individual simply takes the total of all the individual’s asset values and subtracts it from the total of all of the individual’s liabilities to come to their net worth. You do not have to use any fancy calculators or spreadsheets if you don’t wish to do so.
Your net worth is just like any other tool that you would use for making financial decisions. Once you have compiled your net worth even your biggest financial decisions are likely to increase or decrease your overall net worth. For example, let’s say someone goes out and purchases a very expensive car using a loan; this would decrease their overall net worth. At the same time, for example, an individual consistently pays down a loan with cash; this would most certainly increase their overall net worth.
Tracking your net worth over time can be extremely valuable because it helps you see how you’ve been progressing financially and what direction your finances are headed in.
A good example of the type of milestone that people are interested in when they talk about financial success is hitting the million-dollar mark. If your net worth exceeds $1,000,000, you’ll officially be classified as a millionaire and high-net-worth individual. While this sounds appealing, achieving anything more than $1,000,000 typically involves a period of dull digging: saving hundreds of thousands of dollars, investing those dollars wisely, avoiding bad debts, and repeating this process for years.
Your net worth isn’t intended to help you boast about being more successful than your peers; rather, it should be used to compare today’s version of you to the version you were last year. If the number is growing steadily, that’s a mark of success, even though it may not feel that way yet.
Yes, your net worth is only one number; however, it’s a significant number that tells a complete story of who you are financially and where you’re going financially.
