What Is My Net Worth?
A person's net worth is their total assets minus their total liabilities. In other words, it is a person's assets minus their debt. This is the same calculation used to determine the amount of stockholder's equity a company has on their balance sheet. For that reason, sometimes a person's net worth is described as their "personal balance sheet." Similar to how a company watches the strength of their balance sheet very closely, so should a person monitor their personal balance sheet. That's where net worth and the net worth calculation becomes important.
Net worth is important because it affects everything when it comes to your financial future. Here's just a couple ways net worth can affect your future. First, your net worth will determine if you qualify for a loan or mortgage and ultimately affect the interest rate you may get on that loan. Second, the rate at which your net worth grows will affect how quickly you can retire. And that should get anyone excited about tracking their net worth.
For the entrepreneurs reading this, maintaining a strong balance sheet can help you get that individual or business loan at a better interest rate as well.
How To Calculate Net Worth
Above, we gave you the very simple formula for calculating net worth. It's simply assets minus liabilities. If you're new to the net worth concept, you may be wondering what the difference is between an asset and a liability. An asset is something that you own with a positive value. For example, your house, car, retirement accounts, etc. A liability is anything with a negative value such as student loans, mortgages, or car loans. By subtracting the items with a negative value(liabilities) from the items with a postive value(assets) a net worth will be calculated.
ASSETS minus LIABILITIES = NET WORTH
For a simple way of tracking most of your assets and liabilities and then calculating a net worth, we recommend our net worth calculator. It will also show you with a pie graph, how your assets and liabilities are allocated.
Reasons To Know Your Net Worth
- It's the most useful measure of a person's wealth.
- Since net worth is a metric of your total wealth, it will help you track your progress. Are you moving in the right or wrong direction?
- Net worth can help put debt in a better perspective for the person with some debt as well as some assets.
- Net worth will always be a factor when applying for a loan.
Smart Strategies For Improving Your Net Worth
Budget
Cut back on your expenses and budget for the future. Increasing net worth is all about keeping more of the money you earn, so that your assets grow faster. The number one way to increase your net worth is by starting a budget and being disciplined with your finances. Budgeting is a whole other story, but if you need a place to get started, be sure to check out our budget calculator. It will help you begin to think about your budget.
Reduce High Interest Debt
High interest debt is the worst kind of debt because it's interest rate will be higher than any rate of interest you can earn on an investment. Using simple math, this means that money will be leaving faster than it is coming in, relatively speaking. Paying off this higher interest debt will ensure that the money is coming in faster than it leaves to pay interest on loans.
Invest in Income Producing Assets
Invest your money in places that will pay income or dividends. Sure, there's higher flying growth stocks, but they can be volatile, which means they can be more risky. Sometimes, predictability can be better, and that usually comes from investments that provide steady, predictable income. This could mean a wide range of investment from dividend stocks to rental property to municipal coupon bonds.
Conclusion
Net worth is something that everyone should understand and track so that they can always know what their personal balance sheet looks like. Tracking net worth is important for getting to retirement, as well and jumping over many of life's financial hurdles along the way. Any time you want to calculate your net worth, simply total up your assets and your liabilities and subtract your liabilities from your assets.
IQ Calculators hopes you found this article helpful. IQ Calculators is the number one financial calculator site on the web.