When it comes to financial growth, one of the most important measurements to be aware of is net worth.
In this post, we will explain the concept of net worth and why it matters. We will also help you figure out how you can calculate and track your own net worth to find out if you are making progress toward your financial goals.
What is Your Net Worth?
The definition of net worth is simple:
Your net worth is the total value of your assets minus the total cost of your debts and liabilities.
Why Should You Know Your Net Worth?
The reason you need to know your net worth is because it is the single best way to figure out if you are on track financially.
Other numbers don’t necessarily give you the big picture. For example:
- You could earn a very high salary and still have a low net worth if your debts are significant enough.
- You could have a very large amount of money in your accounts and still have a low net worth for the same reason listed above.
- On the flip side, some people with lower incomes and assets might actually have higher net worths if their debts are very low or nonexistent.
If you are not aware of your net worth, you might make assumptions about where you stand financially now and where you are headed that are simply incorrect.
You could be doing better than you think, in which case you might be stressing more than is necessary about your finances.
Indeed, we spend a lot of time comparing our incomes or savings to those of our co-workers, bosses or friends.
We might feel like they are flying past us, but could be surprised to discover that in truth, it may be we who are closer to achieving our financial goals.
On the other hand, you may not be moving towards your retirement goals nearly as quickly as you think you are, in which case you may need to make some adjustments to meet them.
How Do You Find Out What Your Net Worth Is?
You can figure out what your net worth is using just basic math. In fact, all you have to do is some addition and subtraction.
The equation is:
(all of your assets added together) – (all of your debts and liabilities added together) = net worth
Assets might include:
- Money in your checking and savings accounts
- Money in CD accounts
- 401k, IRA, or other retirement accounts
- Real estate
- Stocks and other assets you are invested in
- The value of any businesses you own
- Other valuable assets you own (optional; see below)
Keep in mind that your valuable assets may depreciate. Your automobile, for example, will not be worth as much years from now as it is worth today. So, you need to account for that in your math.
You could look up the expected rate of depreciation, and reduce the amount accordingly, or you could just skip adding it in with your other assets. A lot of people leave out things like this to simplify their math.
Debts and liabilities could include:
- Your mortgage
- Automobile loans
- Student loans
- Personal loans
- Unpaid bills (i.e. medical bills)
- Any other money you owe
Once you have added up everything in both piles (assets and liabilities), you need only subtract your liabilities from your assets. You will then have a number that might be positive or negative. That number is your net worth.
You should calculate your net worth regularly to see how healthy your finances are overall, and whether your net worth is increasing over time.
If your net worth is staying the same, decreasing, or not increasing fast enough to achieve your goals, you will need to consider what you can do to start improving your financial circumstances.
We Can Help You Find Out if You Are on Track Toward Your Financial Goals
At Jumpstart Empire Academy, we can help you calculate your current net worth. We also can provide you with recommendations for options to explore to increase your net worth over time. Contact us today at (559) 540-2275 to get started.