A lot of financial advice puts emphasis on either saving money or making money as a gauge for how well off you are financially. But there’s one number that can’t be measured by how much you make or save, and it’s an important figure to understand.
I’m talking about your net worth. To get an accurate picture of where you’re at, and how to properly build wealth, you need to know how to calculate your net worth.
What is Net Worth?
The formula for figuring out net worth is relatively simple, and is calculated by taking all the debts you owe (liabilities) and subtracting it from your assets, or all the valuable things you own.
Assets (what you own) – Liabilities (debts you owe) = Net Worth
For example; a mortgage would be listed in the debts/liabilities column, while the amount your house is appraised for would be listed in the assets column. Subtracting debts from assets will give you either a positive or negative net worth.
Other assets include any cash on hand in checking or savings accounts, investments accounts, retirement plans, and the like. Liabilities include debts like credit cards, personal loans, student loans, and auto loans.
Obviously the goal is to have more assets than debts so your net worth will be a positive one. Interested in seeing what the net worth of some online entrepreneurs is? Check out this posts that lists the exact numbers.
Why is Net Worth Important?
Understanding your net worth is one of the first steps to creating better financial habits overall. If your net worth is negative, then your first goal will be to pay off debt and eliminate as much liability as possible.
On the flip side, if your net worth is positive, you can start setting larger financial goals and planning for the future. Here are three common reasons why knowing your net worth is important.
- Provides financial security. The greater your net worth, the more successful you will be when overcoming financial difficulties and emergencies. If you have a good amount of assets, or cash in the bank, you don’t have to worry about what the stock market is doing or if the economy is struggling.
- Offers financial freedom. A high net worth means more freedom to make choices and do things that you really want. You don’t have to rely on banks and financial institutions to approve you for loans. Even if you have low income, your savings and assets can help you buy things you really want.
- Allows for more risks. Want to start a business? Fund a charitable cause? Or go back to school? A positive net worth allows for more risks in life, so you can pursue more of your passions. You can take risks without having to worry as much about the consequences because you’re more financially secure.
Your net worth isn’t the only number you should worry about for overall financial health, but it is a contributing factor to whether or not you’re on the right track.
Have you calculated your net worth recently? Is it positive or negative?