What's your net worth? Depends on the perspective. Your worth as a person is priceless so that is not the context of this article.
Often you hear may hear that someone has a net worth of $X million or $Y billion and may have wondered what that actually means. Do you know what your net worth is from a financial standpoint?
Many people don't know what net worth is and even fewer people actually know what their own net worth amount is.
It's really not very complicated to find that out but will require you to look at your financial position and accumulate some information. In simple accounting or financial terms your net worth centers around the word “net”.
Net is usually something minus something else and net is what is left over. For example, net profit is income minus expenses. Net worth is your assets (things you own) minus your liabilities (amounts you owe to other people or companies).
Before you dismiss these as business terminology and think they don’t apply to you if you are not a business owner, I’d ask that you reconsider.
Everyone is a business owner in some fashion. You may be an employee getting a paycheck, but you are also the business owner of your financial life and so business terms like income and expenses and assets and liabilities apply to your personal life just as much as to a business owner.
Do you have less expenses than you have income? Then at the end of the year you should be running a surplus in your finances (profit).
Do you spend more than you make? In which case you are probably running a deficit financially and possibly have a negative net worth.
Your net worth is your financial balance sheet. A balance sheet is as of a point in time. It’s the things that you own or have a right to own (money in bank, retirement savings, vehicle, your home, etc.) minus the things that you owe to other people or companies such as credit card debt, vehicle loans, mortgage loans.
Once you understand this you can start to see how you can increase or grow your net worth. Maybe you don’t need to increase the things you own, but simply reducing your debt can increase your net worth. Maybe its paying off your mortgage faster, maybe its making more payments towards your credit card debt than from adding new debt by buying the next shiny new toy that comes out on the market.
Your net worth is as of a point in time and constantly changes over time, hopefully upwards. If you are not already doing this consider going back to the beginning of this year and calculating your net worth. Using a tool such as Excel can make this much easier to make changes.
Then at the end of this year do that same calculation. Is your net worth increasing or decreasing? Keep doing that at least annually going forward and monitor your trend and if its not what you want, take action because its your financial life.
Your net worth is not necessarily something to be compared against someone else. We are all different and everyone has different things going on in their life. Your only measuring stick should be against yourself. Are you reaching a point of increasing net worth by having less debt in your life or do you have so much debt that you have a negative net worth? If you do, its time to get started on evaluating what is causing that and start making positive changes to your financial health.
If you have a financial advisor ask them if they will help you calculate this and when will you get started. You will get some homework from them most likely to help identify all the items that go into determining your net worth.
If you do not have a financial advisor or yours isn’t helping you lets arrange a call soon and see what we can do to get you started.
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