Maybe you’ve heard the term ‘net worth’ before. Probably when someone was talking about a business or the super rich.
But everyone has a net worth. And knowing it can be a great motivator.
What is it? Your Assets – Your Liabilities. Yep, that’s it.
So, what are assets?
Anything of monetary value that you own.
House, car, bank accounts, investment accounts, retirement accounts, business equity, valuable or rare items, etc. If someone will pay you to own it or use it, that’s an asset.
And what are liabilities?
Anything you owe money on (your debts).
House loan, car loan, credit cards, student loans, etc. If you are required to pay money on it – until it’s paid off – it’s a liability.
Calculating Your Net Worth
Take a spreadsheet. List out all of your assets. Next to each one, write how much they’re worth at this exact moment.
This is actually the hardest part.
If you have equity in a business – what’s that worth right at this moment?
How much, really, is your rare antique china worth?
This is where finance as a science meets finance as an art. You’ll do your best, but maybe estimate a little low to make up for the endowment effect.
Total up all your assets.
Next, list your liabilities and type what you owe next to each of them.
Then, total up all your liabilities.
Now, take your asset total ($1500) and subtract your liability total ($1275). That’s your net worth!
Is it a positive number? Great! You own more than you owe. Keep up the good work.
Is it a negative number? Great! Now you know that you owe more than you own. Time to let go of any past mistakes (we ALL make them). Just focus on your goals and think of little habits that can get you on the right track.
Why Should I Care?
You have financial goals. Your net worth is a good indicator of your overall financial health. It’s also a good way to gauge how close you are to hitting those goals.
I like tracking my net worth because it gives me a broader view.
I watch my savings and checking accounts go up and down each month. And I see my investments climb or take a nose dive week over week. But that only gives me a small glimpse into my financial health.
It’s easy to forget about how much equity we build in our house every month when we make our payment.
And I forget about how much that $400 can earn when I move it from our savings to our investments.
I can get too focused on a crazy month (or months) of spending and forget that we are still building wealth overall.
Knowing your net worth can reassure that you are on the right path.
Even if it’s a negative number now, you will see it build as you decrease your debt (liabilities) and increase your assets over time.
Knowing this number is valuable information that most people don’t realize they can have. Good for you! You took the time to track it. Now you know how and can track it as often as you like! I like to check it monthly, but do what works for you.
Your net worth is just a number.
It is NOT the value of who you are as a person.
I feel it’s important to stress this point.
Some of you may feel down and ashamed if your net worth is negative or just not where you think it should be. That’s okay. That’s a normal feeling in our society. We attach an individual’s value to their financial worth.
But that number has nothing to do with who you are. It has to do with a ton of different factors, many of which you have no control over. That’s okay. It is what it is.
Now you have something more valuable – information. Take this information and use it to create small habits that can guide you in a positive direction.
Don’t dwell on where you are now. Think about where you can be and small habits to take you there.
REMEMBER – Having more money doesn’t make you happier and it doesn’t make you a better person. It is merely a tool to give you more choices in life. Nothing more.
What do you think?
Do you know your net worth?
How does it make you feel? How can you use this information to make better choices while feeling just fine about where you’re at right now?