Net Worth = Assets – Liabilities
Your net worth is a good indicator of your financial health; it shows whether your overall assets are worth more or less than what you owe. Assets are items with monetary value that are listed or can be converted to cash. These assets typically include any money in your bank account, retirement account, investment account, or major items such as real estate, automobiles, and other valuable property. The expenses you owe are known as liabilities for example bills, loans, and mortgages.
Your net worth provides a snapshot of your current financial situation, and one accurate way to determine this is through a balance sheet. List all your assets in one column, along with their estimated or actual value. List all of your liabilities, or what you owe, in the second column. Your net worth is calculated by subtracting liabilities from assets.
Why Your Net Worth Is Important
When you see financial trends in black and white on your net worth statements, it provides a wake-up call, and you are forced to confront the realities of where you stand financially.
You must be realistic when calculating this. You want to estimate where you are right now, not where you think you will be in the future. You will be in a better position to plan for the future if you have calculated your net worth. If you are not on track as regards where you want to be financially, you can start the following:
Knowing your net worth is essential as it can help you identify areas where you are overspending. Just because you can afford something doesn’t mean you have to buy it. To avoid accumulating unnecessary debt, consider if something is a need or a want before you make a purchase.
Pay Down Your Debt
When taking on financial planning and determining your debt, you also want to be sure to list everything you owe. Reviewing your assets and liabilities can help you develop a plan for paying down debt.
Save and Invest
Your net worth figures can encourage you to save and invest. If your net worth statement shows that you are on track to meet your financial objectives, it can motivate you to keep going. If, on the other hand, your net worth shows that there is room for improvement, it can provide the motivation you need to start saving and investing more aggressively.
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