Do you want to know how much money you have but have no idea what “net worth” means?
The concept of “net worth” has emerged as a standard method of evaluating financial success.
An average person could complete the math on the back of a cocktail napkin. It’s important for everyone to know how much money they have and to update that number every month. Your net worth may be easily determined and monitored with the aid of a number of free online resources.
What Is Your Net Worth?
Simply put, your net worth is the value of all your assets less all your debts (more on both shortly). When your assets exceed your debts, your net worth is positive. Having a negative net worth indicates that your obligations are greater than your assets.
To simplify things, picture a high school student who has just gotten her first bank account and credit card. There is a debt of $40 on her credit card, but she has $100 in her bank account. She has a total of $100 in assets and $40 in liabilities, giving her a net worth of $60.
Your wealth is measured by your net worth. With any luck, you’ll be able to save up enough money over your working life to retire with a nice nest egg. In retirement, you may expect to rely on the proceeds from your investments, the sale of any remaining assets, and, perhaps, Social Security. If possible, you should be able to accomplish this without worrying about money running out before you die.
That’s why knowing your net worth is a good way to gauge how close you are to achieving your financial goals, including early retirement. However, it also affects your capacity to do things like purchase a house or provide money to your children for education.
It is important to remember that your salary has no impact on your net worth. In the past, I’ve met people with high incomes who were unable to keep up with their spending and ended up with a negative net worth. Some of the wealthiest people I know are those who live on a relatively modest salary yet nevertheless manage to save a significant portion of their earnings each year.
The term “net worth” is used to describe an individual’s monetary status at a specific point in time. Cash flow is not a metric that is taken into account.
How to Determine Your Net Worth
Calculating one’s net worth requires no more complex arithmetic than simple addition and subtraction. To do this, you first tally up all of your assets, then add up all of your debts, and then deduct from your debt the total amount you owe on your assets.
To this day, not everyone has a firm grasp on what constitutes an asset and what constitutes a liability. Take a look at this brief rundown of my assets and debts.
Assets
Everything you own that can be sold for money is considered an asset. They might be easily convertible into cash, like a bank account, or much more difficult, like a house. To put it plainly, a liquid asset is one that may be converted directly into cash without the need for any further steps. The following are some instances of assets:
- Your residence’s market worth
- The current market worth of your autos
- The amount of your investment accounts, such as your brokerage account and retirement funds such as a 401(k) or IRA.
- The total balance of all of your checking and savings accounts, including certificates of deposit (CDs) and money market accounts.
- A full
life insurance policy’s cash worth - Important goods you own, such as art, furniture, expensive jewelry, and collectibles.
Personal property such as artwork and jewelry should only be counted as an asset if an expert appraisal has been obtained.
Liabilities
The opposite of assets, liabilities are amounts owed to other parties. The whole loan balance is what counts against your overall liabilities, not the sum of the monthly installments. These are some typical forms of liability:
- Mortgage financing
- Auto loans
- Balances on credit cards
- Loans for students
- Loans for individuals
- Expired medical bills
- Taxes owed
- You have liens and judgements against you.
Net Worth’s Applications and Limitations
One’s “net worth” can be a quick and helpful indicator of their financial well-being. It’s one of three key financial indicators you should review on a monthly basis. Your FIRE ratio, the proportion of your monthly costs that are covered by investments or retirement savings, is the other. (Find more about additional indicators of one’s financial health here.)
In retirement, you will need your savings for the reasons given above. Your wealth index measures how close you are to reaching your retirement savings goal. It’s important to calculate how much money you’ll need to retire and use that number to track your progress. At that level of wealth, early retirement is possible at any age.
You may be limited in the investing options available to you based on your current net worth. Certain investments in the United States are restricted to “accredited investors,” or those with a net worth of $1 million or more (or with high salaries). If you can’t handle your finances, Uncle Sam won’t trust you with his money.
Your monthly budget, cash flow, and income are all things that net worth doesn’t reveal. While a greater income facilitates the accumulation of wealth and a larger net worth may be put to use in the form of investments to generate passive income, the figure represents just a snapshot in time.
How to Automatically Track Your Net Worth
To keep tabs on my financial situation, I utilize Mint.com. I was able to link all of my financial and investment accounts, and now whenever I check in, it updates itself with the most recent information from each one.
On the same day every month, I take stock of how far I’ve come. As the ebb and flow of your monthly budget might distort the statistics, it’s best to conduct this at the same time every month to ensure consistency. The money you have on hand at the beginning of one month, fresh from a paycheck, may be greater than the amount you have left in the middle of the next month, after expenses have been paid.
To that end, Mint may be used to create a monthly budget and send you notifications if you start to deviate from it. A net worth graph is shown to help you see how your wealth has grown over time. Instead, you can keep tabs on both your wealth and your assets with the help of Personal Capital. Or, if neither of them appeal to you, try one of these alternatives to Mint.
If you use one of these tools, you won’t have to manually calculate your wealth each month, increasing the likelihood that you’ll stick with the practice. It’s important to keep tabs on your development since it puts the process of accumulating money in the foreground and makes it more likely that you’ll reach your long-term financial objectives.
Bottom Line
Net worth is a useful indicator of financial health, but it is not the only tool in your financial toolbox.
In addition to regular checks on your net worth, you should also use budget analysis and monitoring tools to create a long-term financial strategy that includes things like saving for a down payment and retirement. Budget with Tiller or Personal Capital to reach these objectives, and monitor your net worth regularly to see if you’re on track.
Try to create passive income sources as you increase your wealth. You can quit your day job if you have enough passive income to pay your costs of living. When you no longer have to rely on a 9 to 5 job for financial support, you’re free to make many more decisions about your career, family, and general way of life.
