Why Your Net Worth Is Important
How much are you worth? If you sold everything you own, cashed out all of your investments, and paid off all of your bills, what would you have left over? That amount is your net worth. You need to track your finances and that’s why your net worth is important.
Why your net worth is important: The accumulation of money is what will allow us to retire or make other long term plans. Remember, your social security by itself will not be enough to live on.
Your net worth is what you have left over after all the bills are paid
Why Your Net Worth Is Important
If you’re working on building your wealth, your net worth is a very significant indicator of how well you’re doing. Tracking your net worth monthly and annually will allow you to compare the value of your currant assets to last month or last year.
Figure Your Net Worth
It’s easy to figure your net worth. Essentially, it’s subtracting the value of your liabilities (financial obligations) from the value of your assets. The final figure is your net worth. A positive number is what you’re looking for, but it is possible—and not uncommon—to have a negative net worth.
It’s fairly simple find the value of your liabilities. Total all your debt. You’ll have the statements from the various banks and other entities to which you owe money, so that should be easy. Totaling your assets requires more work. Along with investment and savings statements, you’ll need to do some research to determine what you could reasonably expect to get for assets that could be sold (liquidated) like your house. This shouldn’t be too hard to do: Find out what sellers in your neighborhood are getting for a house similar to yours, and for automobile values the NADA Blue Book is a good resource.
I think I want to go a bit more into assets and liabilities.
Assets
Can you account for all your assets? People sometimes have more (or fewer) than they initially think.
What follows are brief descriptions of some notable asset categories.
Your home is the largest investment most people make
1) Liquid assets: Cash or items that can be turned into cash—bonds, treasury bills, money market funds, and retirement accounts. Non-retirement investments such as your primary residence, cars, jewelry, antiques, and other property that have value are also counted as liquid assets. (I’ll have more to say about some of these in a note at the end of this section.)
2) Business assets and equity: If you own a business or are a partner in one the accoutrements attached to it could be assets. But … don’t make presumptions. What you consider to be assets are not always marketable. From experience, I can tell you that just because you own something doesn’t mean you will be able to sell (liquidate) it. Also, there is a difference between Accounting Value and Market Value.
Let Me Explain That …
If you want to buy a piece of equipment, you have to pay a price for it. The price you pay along with any depreciation is its Accounting Value. (This figure will continue to become smaller over time, mostly due to depreciation.) Should you decide to sell that piece of equipment, you might not be able to get your Accounting Value as a resale price. Essentially, you’ll get what the buyer is willing to pay. What a buyer is willing to pay is the Market Value for the equipment, and it’s usually less than your Accounting Value for it. However, if you happen to have buyers competing for the equipment, it’s possible the Market Value may go up.
If you need to include the value of business equipment in your net worth, you need to consult your tax preparer or, perhaps, a tax lawyer.
3) Personal loans receivable: These are usually loans you’ve made to family, friends, or business partners, and it’s reasonable to assume you will collect on them.
4) Other assets: Other assets are things like some life insurance policies can be turned in for cash. This category (along with the others) overlaps with the first—liquid assets—in that for anything to be considered an asset, you need to be able to convert it to cash. (To be able to convert it doesn’t mean you have to.) This is important when you take into consideration antiques, jewelry, etc.
Note: The worth of valuable collections and similar assets may be hard to assess. Because they are involved in buying and selling fairly regularly, many people who maintain these collections already have a good idea of their worth. If you don’t, there are professionals who can help, but their services are costly. For most of us who “have a few things” it’s probably more efficient not to include them in figuring our net worth.
Liabilities
Most people find they have a number of liabilities. Basically, your liabilities are any amount of money owed to anybody. The list below is some of the common ones.
1) Mortgages: A mortgage’s collateral (security) is the asset the mortgage finances. This could include your primary residence or other habitable
It’s important to know what your liabilities are
properties. It also includes second mortgages and home equity loans.
2) Installment loans: When you finance something like a car, furniture, or boat, the company selling you the item often has a division or an associated loan company that pays for the purchase. You are then required to make monthly payments to that entity until the balance is paid in full, including any interest charged.
2) Student loans: If you financed your education with loans specifically designed for that purpose, you have to pay it back. This is also true if you are a consigner on an education loan for your children or spouse. Payment is due monthly until it is paid off (including interest). (Thankfully, there are programs that may mitigate some of the amounts.)
3) Credit cards: You are liable for any outstanding balances (including interest).
4) Business loans: Most business loans are backed with a personal guarantee from the person that borrowed the money. You’re required to pay back the loan with interest.
5) Personal loans: Any (significant amount) of money you borrow from a family member, friend, or business associate is a personal loan that you legally must repay. Also, the IRS has standards for including interest. (Check with them for this information.)
Personal loans are interesting when it comes to figuring liability. Sometimes, there is no security required, no signatures, and no paperwork involved (and that can be illegal on the part of both parties). If there really is no evidence of the loan, should it be included as a liability? Morally (and legally) that money needs to be repaid, so do it right: Have a written loan agreement with copies for both parties.
6) Other liabilities: These liabilities include medical debt, tax arrears, and anything else that has to be repaid but doesn’t fit in another category.
After you have totaled both your assets and liabilities, you can figure your net worth.
How To Increase Your Net Worth
I’ve already given you the formula for figuring your net worth:
ASSETS – LIBILIETS = NET WORTH
It’s simple subtraction, so the concept of increasing your net worth should be easy, too: Increase your Assets or decrease your Liabilities (or both).
To increase assets earn more money (second jobs, side gigs, etc.). Sometimes, you need to be more efficient with what you already have (adopt a frugal lifestyle). And, you need to make your money work for you (save and invest).
To decrease liabilities pay them down and off; definitely avoid accruing more.
You can increase your assets and decrease your liabilities at the same time … From a frugal point of view becoming debt free is most urgent: If you owe money, your money is not really yours.
Why Tracking Your Net Worth Is Important
Tracking your net worth diverts your mind from income only. (There is more to amassing wealth than making a lot of money.) Net worth is measured by assets minus liabilities. If you have a million dollars in assets, but also are in debt a million dollars, you’re broke and your net worth is $0. Tracking your net worth keeps your assets to liabilities in their correct perspective. You should have more assets than liabilities (debt), and the value of your assets should increase with time.
Your Net Worth Is An Overall Measure Of Your Financial Strength.
As you track your net worth, you’ll see some oscillation in its value. For example: When you buy a house, your assets will increase but so will your debt. As time goes by and you make payments, your debt (on the house) will decrease, and your net worth will improve. Or, if you have stock investments, your net worth could reflect market fluctuations. One reason your net worth is important is that you can take corrective measures if your assets develop a negative trend.
Note: Over time, you want to see an increase in the value of your net worth. While (as explained above) some temporary negative variations are expected, you don’t want to see a sudden decrease in value because of irresponsible spending.
Conclusion
Why Your Net Worth Is Important? Your net worth is an overall indicator of your financial state. It’s an easy number to figure: Simply subtract the total of your liabilities from the total of your assets. What remains is your net worth. Decreasing or increasing your liabilities and assets, as well as your general lifestyle, all influence the strength of your net worth. That’s why it’s important to know your net worth: That figure will help you make decisions to secure your future.