WHAT IS NET WORTH? (AND HOW TO IMPROVE YOURS!)

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“Your net worth is one of the best ways to see where you stand financially.”
Chris Hogan

Defining Net Worth

If you’ve spent much time exploring personal finance then this is probably a term you’ve at least seen (even if you don’t fully understand it).

My goal here is to explain exactly what people mean when they discuss net worth in plain language.

I also hope to give some ideas on how you might be able to stabilize your personal wealth even today, should you choose.

Let’s begin with a simple definition of the term: Net worth is the difference between your assets and your liabilities.

Now if that’s still not a clear enough definition for you, no biggy. Check out this post for a clear explanation of assets and liabilities – View Post

Why Does It Matter?

So, why do you need to know this?

Well, the short answer is that it gives you a good idea of where you are financially and if your money is safely spread around in the right places.

Maybe after you calculate your net worth, you learn that 40% of your assets is in boats. Unless you are in some sort of extremely rare situation, it might be time to sell a boat or two and build up some cash or investments.

Or worse, you may figure your net worth and, despite driving two Teslas and living in the nicest neighborhood in town, find that you have a negative net worth. How? Because you built your life using debt. And as good as it looks and feels, this should be a warning that you are one emergency away from real trouble.

We use our net worth to show us where our money is, evaluate the security and risk we’ve allowed into our finances, and reallocate as needed to get us on stable financial ground.

Calculating Your Net Worth

Figuring your net worth is pretty simple. You may have to do a little digging to see the current value of all your investment accounts and real estate balances.

First, make a list of all your assets and their current values.

Next, add up the total value of all of those assets.

Now, make a list of any and all debts you have.

Next, add up the total value of all those liabilities.

Finally, subtract the value of your liabilities from the value of your assets.

You now know your net worth!

While I think it’s an important exercise to do this manually, I do also want to share this awesome tool from Chris Hogan. Using his Net Worth Calculator, you can be sure that your personal math mistakes don’t get in the way of accuracy. You can find that tool here – Visit Page

Improving Your Net Worth

Alright, I already alluded to this, but let me say it more clearly.

If you find that your net worth shows an imbalance in how your money is allocated, it’s probably time to make some corrections.

For some of you, that may be as simple as selling off some vehicles or single stocks. If half of your investments are in one company that isn’t yours, probably time to diversify.

For others, your assets might look good on paper, but they are weighed down by debts tied to those same assets. While it may take more time, this is still a pretty simple fix (theoretically). Just pay down those debts as quickly as you can. If it means pausing some other other things in the mean time, that’s fine!

A Personal Example

Let me give you a personal example. My wife and I at one point kept very little cash on hand, had most of our non-retirement investments in a single stock, owned a rental property with debt tied to the property, and owed more on our primary residence than the value of all those things combined. When you threw in our retirement accounts, we had a positive net worth, but we did not have the level of security we wanted, especially when you factored in the credit card and student loan debts we carried.

We decided our financial purpose was going to be stability for our family, and we made BIG changes. We sold off stock, downsized, and paid off all our debt. Our net worth didn’t change a lot on paper. But, the way we moved our money around brought us the stability we wanted for our growing family.

Do This Today

So take a second today, figure out your net worth, look at where your money is, and decide if this aligns with your financial purpose. Then take action!

Also, learn more about establishing your financial purpose here – Know Your Financial Purpose. This will help you understand the steps you should take.

Regardless of your money goals, you can “Bank on a Budget” to get you from where you are to where you want to be!

We use our net worth to show us where our money is, evaluate the security and risk we’ve allowed into our finances, and reallocate as needed to get us on stable financial ground.

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Alex

Hello, my name is Alex! I'm a public school teacher who has achieved some big financial goals just by getting control of my money using some simple strategies like using a monthly budget. Now I'd like to share what I've learned with you. Welcome to "Bank on a Budget!"