Why You Should Know Your Net Worth
Most people don’t begin to focus on their net worth until retirement gets close. But, as an essential indicator of financial health, watching your net worth improve, decline, or stagnate, makes financial decision-making easier. And as you talk to your fee based financial advisor in Centennial, you’ll discover it’s far more challenging to make a difference the closer you get to retirement.
As a young person, keeping track of financial progress often revolves around making a higher income. Net worth doesn’t seem meaningful, either because it is relatively low or because the focus is on consumption, not savings. Plus, income easily gauges success as compared to others, whereas net worth may be almost invisible. High earning actors and athletes declare bankruptcy to demonstrate how income and net worth diverge.
It goes back to vision. If you focus on the purposes of money in the future, you start to see the accumulation of wealth as a process. Then, your net worth becomes a sort of scorecard as it tracks your accomplishments.
What is Your Net Worth?
So, your net worth is what you own (your assets), less what you owe (your debts or liabilities). The math looks like this:
Net Worth = Total Assets – Total Debts
So, if you own $2,500,000 and owe $500,000, your net worth is $2,000,000.
And if you own $30,000 and owe $38,000 your net worth is negative $8,000.
Calculate Your Net Worth
The calculations are simple once you correctly identify the components. For example, your vehicle is an asset. But, if you finance it, then it is also a liability, just like your house.
Firstly, list your assets with a cash value.
- Cash in hand
- Checking accounts
- Savings accounts
- Money market or CD account
- Retirement plans
- Non-retirement investments
- Life insurance cash values
- Any collectibles – art, jewelry, antiques, etc
- Real estate – personal home, land, investment properties
- Business equity and assets
- Vehicles
- Other assets
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Then, list your debts.
- Mortgage balance
- Car loan balance
- Student loan balance
- Credit card(s) balance
- Lines of credit balances
- Personal loan
- Medical bill
- Outstanding taxes
- Outstanding alimony and child support
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Total up each list and subtract your debts from your assets. That’s your net worth. Someone’s net worth can be negative. But what’s important is making it grow in the future. And there are three ways to improve your net worth. Increase your assets, reduce your debt or do a combination.
For many, this calculation is complex. If so, check with your fee based financial advisor in Centennial to provide you with an unbiased assessment.
Summary
The numbers don’t lie. Your net worth needs to be monitored regularly because it indicates whether your finances are getting better, worse or staying the same. If your net worth decreases, diagnose the issue (like growing credit card debt?) and make the necessary changes. Overall, the goal is to have a higher net worth every year.
Lots of things can negatively impact your net worth, like buying a house, temporary stock market corrections or medical emergencies. Carrying student loans impact your net worth, sometimes for decades. But your net worth changes over time. Almost every financial decision changes your net worth, for better or worse. So, discuss your situation with your fee based financial advisor in Centennial. Then, framing financial decisions with “How will this impact my net worth?” can help focus your vision for your future.
