The net worth of an individual represents the only thing that provides a true picture of whether or not one’s financial situation is improving. No assumptions, no guessing; simply one instantaneous view.
Many people too often are focused on their income, how much money they earn monthly, or perhaps that they are spending too much. However, if you do not track your total asset accumulation (and net worth) over time, it will be very difficult for you to determine whether or not any of the above actions are actually working to benefit you.
Thus, your net worth is a significant tool for converting your financial status into hard numbers.
To begin, determine all the debt you have to pay, not what you own. Such debts include:
- Mortgages
- Student loans
- Credit cards
- Car loans
Essentially, any loan that has not been fully paid back goes into this category.
Next, sum up the total debts in order to arrive at the total liability amount—the total of all the debts your currently have and owe. This dollar value represents the total amount of financial pressure that you are under today.
Assets include items that have true financial value, which include;
- Your home (including property, land and buildings)
- Your automobile (including cars, trucks, vans, etc.)
- Cash in your bank accounts
- Investment or retirement accounts (401Ks, etc.)
You do not have to worry about trying to put a value on every little item you possess. Most individuals keep it fairly simple by identifying the most expensive items they have.
For example, if you calculate the value of your house or the resale value of your vehicle, you will usually obtain sufficient information to have a good idea of what your total assets are.
Once you have added up all of your total assets and all of your total liabilities, you will then subtract one from the other to obtain your net worth.
For example, if your total assets are equal to $335,000 and your total liabilities equal $235,000, then you would have a total net worth of $100,000.
This number provides an overall indication of your current financial situation.
If your result is negative, you are not necessarily doing anything wrong.
A negative net worth usually just means that the amount of debt you currently owe is greater than your total assets. This is something that many people experience, especially during the early years of their careers, or if they have substantial student loan debt.
Remember, it does not matter where you begin; instead, it matters what the eventual direction of your future wealth accumulation will be.
Instead of considering your net worth a single calculation, view it as a tool to measure how far you’ve come.
Every investment or other smart financial decision should lead to positive change in this amount.
For example:
If you pay off a debt, your net worth will increase.
If you save or invest more than you previously did, your net worth will increase.
If you take on new debt, your net worth may be negatively impacted.
Because of this, you have a powerful decision-making tool.
A person who has at least one million dollars worth of assets is a millionaire based upon the definition of a millionaire.
That said, the exact amount is not what’s most important.
It’s all about consistency; reviewing your net worth repeatedly will enable you to adjust as necessary.
When you know your net worth, then there is no more guessing about your current financial circumstances: from this point forward, you’ll be able to better control/structure your finances with intent.
