We’ve talked about creating our road maps and designing goals to get us there, now let’s dig into learning about finance. Just like creating a life plan, we need a way to assess how we are doing financially. One way is to look at your net worth.
What Is Net Worth?
Your net worth is a snapshot of your financial health at the given time. It covers the bases on how much money you have and the value of the things you own (your assets) verse how much money you owe (your liabilities). In short, your assets minus your liabilities at a moment in time. Your net worth does not include any income streams you may have.
Assets –
Assets are what you want to increase! They are made up of your money in the bank, investment or retirement funds and items you own that are worth a monetary value. That can cover anything from your home, RV or your old diamond necklace. Anything that has a resale value that you could potentially sell. A general rule of thumb is items worth more than $500.
Liabilities –
Liabilities are what you want to decrease! They are made up of your debts or money you owe. That covers loans of all types, even those nasty student loans and credit cards. The bad part about liabilities, is you can actually have a negative net worth because you owe more than you own. Definitely something we do not want!
Calculating your Net Worth –
To calculate your net worth, start by listing your assets and their monetary values. Then list your liabilities and add the two together. I recommend either writing it down by hand or using an excel spreadsheet. For me personally, I use excel to track not only net worth but most of my finances. Either way, keep your net worth statement in a place where you can review it and update it easily.
The financial choices and steps you make in life can really have an impact on your financial health. How much money you make, the vehicles you choose to buy and the other financial choices you make can drastically impact you for the rest of your life. Here are two examples. One has a used car worth less than $9,000 and only $10,000 of student loans. The other has a newer car worth $16,000 and $60,000 in student loans. Example one has a net worth over $90,000 while the second one is negative over $7,000.
Now that doesn’t mean that student loans and expensive cars are all bad! You just must be smart about the choices you make and the steps you will take in the future to reach your end game.
Improving your Net Worth –
Remember, you net worth is a snapshot of your financial health at a moment in time. It will fluctuate and change overtime as your life changes. You need to go back reevaluate your net worth to make sure you are still on track for your goals. I personally recommend reviewing your net worth at least every year or every six months would be better. Living on a budget and reviewing your net worth are essential to accomplishing your financial goals. The budget can be a weekly or monthly tool while the net worth should be tracked for years.
One of the best ways to Improve performance is to provide feedback or to have a baseline to go back and review it as often as possible. This is why having a net worth calculated and recalculated annually or semiannually, is so important. It gives you the picture, a snapshot of what you own what you owe and what that means at a given point in time.
To increase your net worth, focus on increasing your assets. Saving money, increasing investments, or buying a rental property are a few ways. You should also focus on decreasing your liabilities. You want to get as far away from debt as possible. Find ways to adjust your budget so you can pay off your debt faster. Remember, time is money and in the world of money, it is the power of compounding interest. The longer it takes you to pay off a loan, the more money you lose to it. The longer your money is invested, the more money your will earn off interest.
© EuduringFinances, 2021. All Rights Reserved.
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