A lot of advice has been given about money – how to monitor your spending, how to save, how to diversify incomes, etc… Some of it taken and a lot of it ignored too. But there is one bit of financial advice that way too many people take for granted. Probably because doing it, on its own is not a guarantee for better finances.
However, an individual’s net worth is probably the one most accurate means of measuring his/her personal wealth. This is just one reason why it’s so important. Everyone plans to increase their wealth and be financially independent, even after retirement and knowing your net worth is the first step.
So what is your net worth?
This is how much more assets you have than liabilities. Simply put, the net worth of a individual is the difference between what you have and what you owe. A positive net worth means your assets are greater than your liabilities and a negative net worth means that the reverse is the case.
How do you calculate it?
In order to have a value that is close enough to accurate, you need to know what exactly your assets and liabilities are. What you have and what you owe, what gives you money and what takes it out of your pocket.
In this context, your assets are valuable things that you can convert into cash. Things like cash itself, personal property like vehicles, real estate and jewellery. Liabilities are basically what you owe like debts, loans, bills and the like.
While it’s almost impossible to calculate accurately the values to these things, try as much as possible to make estimates that are very close to what is obtainable at that time. For example, if you have a car you need to value, a good way to do it would be to meet a few car dealers and get an average price based on mileage, model and the condition it’s in.
If your combined assets cost 200,000 and your liabilities come out at 150,000 then your net worth is simply the difference between the two, that’s 50,000.
What does it tell you?
- Just how wealthy – or not – you are.
Like I said before, a person’s net worth is probably the most accurate means of measuring wealth. After all the bills have been covered and expenses taken care of, wealth is what is left. If your net worth value comes out negative, then you need to make some changes.
- Your wealth is not solely dependent on how much you earn.
Most people only judge wealth in terms of what they make and the income their profitable investments bring them. This is important of course, but calculating your net worth will awaken you to the fact that what you spend and how you spend should come into the mix too.
An increasing income doesn’t necessarily mean a better financial position. If your net worth remains the same, or even declines despite your higher earnings, then you need to find and plug some liability holes.
- Where you are financially:
Another thing discovering your net worth tells you is just where you and your family(if you’ve started one yet) stand when it comes to finances. There is probably nothing as sobering as discovering you have a negative net worth when you have a large family to cater for. This will begin to give you an idea of the liabilities you need to get rid of and other measures you need to take i order to get yourself out of the red. Of course, there are also savings plans for kids university and your retirement, so your projections should not just consider the present.
- How likely you are to get a loan:
It’s no surprise that your net worth comes into play when you’re looking for a loan, seeing as it’s the best way to measure your financial strength. This information will let banks, financial houses and individual lenders know whether or not they will grant your loan request.
If your net worth shows that you need to improve your financial situation and you don’t know how to go about it, there are basically two ways of doing so.
The first is increasing your assets and the income you get from those assets and the second is reducing your liabilities, debts and basically all things that take money from your wallet.