If you’ve been paying attention to the world of finance, you’ll most likely have come across Forbes list of the richest people in the world. The people on that list are the crème de la crème controlling most of the global wealth with net worth running into billions of dollars. Most people will never get into Forbes’ list of the worlds richest; yet, nothing stops you from calculating and knowing your net worth. This piece provides insight on what your personal net worth means for your personal finances.
What is personal net worth?
The personal net worth is a financial tool that provides a snapshot of your financial health at a specific point in time. Your personal net worth is simply a financial calculation in which you’ll subtract your liabilities (all the money or debts you owe) from your assets (all the cash, investments, and stuff of tangible value you own). Your personal net worth is dynamic and it will rise and fall in tandem with your financial decisions over time.
How to calculate personal net worth
To calculate your personal net worth, you can start by writing (or typing) out a list of all your assets. Your assets include your cash in the bank (include both savings and checking account balances), any bonds or treasury bills you own, the current total value of your investment in stocks, the current market value of your home and cars. You can also include the value of other tangible items such as fine jewelry and artworks. However, you should be careful not to bloat your asset list with consumer items.
You’ll also need to make another list detailing your liabilities (things that take money out of your pocket). Your liabilities will contain a mix of fixed and variable expenses – you can use the last known value of the variable expenses for this exercise. Your liabilities include mortgages, car loans, student loans, credit cards, back taxes, medical bills, and alimony among others.
Now subtract the total value of liabilities from the total value of assets. A positive number net worth indicates that you’ll still have money left over if we sold all your assets to pay off your liabilities. A negative net worth indicates that you’ll still have some unpaid debt if we sold all your assets to pay off your liabilities – a negative net worth is a bad financial position.
Pro Tip: Your mortgage and student loan debts could cause your finances to show a negative net worth even though you are making sound financial decisions in other areas of your life.
Using your net worth to improve your finances
Your personal finance net worth can only provide a snapshot overview of your financial position. You might need to do other detailed exercises to track your cash flow, expenses, and budgets. Nonetheless, a statement of your personal net worth help you know how close or far away you are from reaching your long-term financial targets.
Interestingly, your personal net worth show a wildly different result if you combine finances with a partner. Misaligned financial goals, hidden credit card debt, poor credit scores are some of the factors that could affect your personal net worth. However, you might find it much easier (and faster) to reach financial goals if you and your partner share the same/similar values on money.
Tracking your network consistently ideally, monthly or quarterly, can also help you track the progresses made in your finances. You’ll be able to know if you are closer to paying off your auto loans, student loans, and mortgage among others. You’ll be able to know if the value of your home has increased or reduced so that you can make appropriate adjustments in other parts of your finances. Regular net worth checks coupled with expense tracking and budget analysis software could go a long way in helping you reach your long-term financial goals.