According to Investopedia, a person or company’s net worth is “the amount by which assets exceeds liabilities”. More commonly put, net worth is the total value of your assets minus your debts. Net worth can apply to a business or a person. I will be applying the Net Worth concept to individuals in this article.
Everyone has a net worth, regardless of the value. However, if your outstanding debt is higher than the value you have in your savings, investments or physical property, it is possible to have a negative net worth. By calculating your net worth now, and comparing to your net worth in the next 1, 2 or 5 years, you can begin to see the progress of your goals toward financial independence!
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Calculating Net Worth
As mentioned earlier, your net worth is calculated by taking the total amount of your assets and subtracting by the total amount of your debt. Simple enough, right? The tricky part is making sure you are properly classifying your assets and liabilities. An Asset is anything that is of Value/holds value.
Here are some examples of assets to consider when calculating your net worth:
• Cash (in accounts or on hand)
• Current value of bonds, stocks, or other investments
• Retirement fund balances
• Current market value of your house or other properties held
• Current value of your car, boat, plane, or other vehicle
• Jewelry (diamonds, silver, gold)
• Any outstanding debts owed to you (Debtors)
A liability, or debt, is any financial obligation that you have or money that needs to be paid back to someone.
Here are some examples of common liabilities/debts:
- Home or vehicle finance
- Credit card balances
- Student loans
- Outstanding taxes owed
- Any outstanding debts owed by you in your personal capacity to others (Creditors)
Remember: Assets – Debts = Net Worth
Understanding Net Worth
If you have calculated your net worth and realize that you are in the negative, don’t let that discourage you. You are not alone!
There are two ways to increase your net worth:
- reduce your debts
2. increase your assets.
Doing both at the same time will increase your net worth faster than doing just one or the other. Sure, it is easier said than done, but it is not impossible at all. You have to put yourself in a situation to succeed financially. This requires discipline, knowledge of your situation, and tracking your finances.
If you have already calculated your net worth, then you are on the right track. This will give you an idea of what you really need to focus on.
If your debts are high, then work on decreasing that first. Knocking out those credit cards,loans or any other lingering debt as quickly as possible will help increase your net value in no time. Try paying off smallest debt first. Use any extra money you can without hurting your other obligations. Make sure you are paying at least the minimum payments on all other debts, until your smallest debt is knocked out; then move on to the next.
If you already have your debts under control, start increasing your assets by adding more money to your savings, retirement fund or investments.
Get yourself on a budget so you can see where certain expenses can be reduced to increase your income for savings.
P.S. IF YOU WANT TO REALLY GET YOUR FINANCES UNDER CONTROL, SIGN UP HERE FOR MY FREE FINANCIAL FOCUS CHALLENGE! The financial focus challenge is a guide to map out your financial priorities, create a monthly budget and get on financial track.
Do you have any questions about net worth? Leave your questions, comments or feedback in a comment section below.