Do you know Taylor Swift and Elon Musk’s net worth but not yours? Do you think net worth is only for the rich and the famous? If yes, then you should read further to know the five reasons why you should calculate your net worth since it is as important as that of any celebrity.
Before you start the number crunching and begin to calculate your net worth, it is important to understand some terms first.
What is net worth?
Net worth simply means how much you own minus how much you owe. In slightly complex terms, it is the difference between assets and liabilities. Net worth = Assets – Liabilities
What are assets?
Assets are the things that you own. Assets include:
- Cash
- Bank accounts
- Brokerage accounts
- Savings
- Real estate
- Personal property like car or jewelry
- Collectibles
What are liabilities?
Liabilities are the things that you owe. Liabilities include:
- Credit card dues
- Mortgage
- Personal loan
- Student loan
- Any kind of debt
Want to read about the net worth of some popular people, read our blog. Here are the five reasons you should know your net worth.
To know your financial status – Example for Net Worth Calculation
This is sort of a reality check. Looking at your net worth will give you a clear picture of where your finances stand and where they should be.
Let’s look at two examples, to understand the concept better:
Example 1:
- Savings = $10,000
- Current value of car = $5,000
- Student loan = $10,000
- Net worth is $5,000 {($10,000 + $5,000) – ($10,000)}
Example 2:
- Savings = $3,000
- Current value of car = $5,000
- Student loan = $10,000
- Net worth is -$2,000 {($3,000 + $5,000) – ($10,000)}
Negative net worth means you owe more than you own. Don’t be scared if this happens. It is absolutely normal to start with negative net worth but it is equally important that you know your situation and start working toward making it positive.
Negative net worth doesn’t mean you’re financially irresponsible. It means that right now your debts are more than what you have in assets. This is fine because maybe you just started your career and have a student loan. Don’t worry because you will gradually repay that loan and your net worth will increase.
If your net worth is positive, you should try to increase it by building on more assets and reducing debts.
Also, keep in mind that net worth is something that keeps fluctuating, so don’t panic when you see ups and downs in your spreadsheet.
To identify financial problems
Knowing your net worth helps you identify which are the problem areas in your finances. You can fix them only when you know them. Approach your problems before it’s too late.
You will know what costs bring your net worth down and how you can cut down on those expenses. You can plan to save and invest more if you have too many liabilities.
Calculating your net worth also helps you review your spending habits. For example: Is it wise to buy a fancy pair of sunglasses on a credit card? Should you take a personal loan to go on a vacation? These kinds of actions increase your liabilities. Tracking your net worth will help you spend wisely. You can easily identify your wants and needs.
To set financial goals
The knowledge of your net worth helps you set long-term and short-term goals. You can be clear about your financial goals only when you know what your current financial health is.
Once you have your net worth calculated, you will know how much you want to grow your assets and how to save or invest more to reduce debts.
This will also help you identify your liquidity. Liquid net worth comprises the assets which can be easily and quickly converted to cash. In case of a financial crisis or emergency, you can use your liquid assets.
To pay off debts
When you have a clear snapshot of your liabilities, you can work on reducing your debt load. You can try to pay off some of your high-interest debt with some cash. This will help you save money on the loan interest and will be positive for your net worth in the long run. You should always work towards minimizing your obligations.
To plan for retirement
It is impossible to set your retirement goals without the knowledge of your net worth. You definitely don’t want to carry your liabilities to your retirement years. To secure your future, you need to assess your current financial situation. Building a retirement fund will also improve your net worth figure.
You should review your net worth over time, maybe yearly or on a quarterly basis. When you do that, remember some assets like cars or jewelry are depreciating which means their value decreases with time. You need to know their value at the time of calculating your net worth.
Calculating your net worth might seem an uphill task but we have made it easier for you.
