What is Net Worth and why is it important?
Your Net Worth can be described as your Assets minus your liabilities. Start by adding up all your assets, including the cash you have in the bank, retirement accounts, the value of any properties that you own, investments, etc. After you’ve accumulated that amount, gather all your liabilities, including your mortgage balance, student loans, credit cards, etc.
As an example, let’s say you have $500,000 of assets and $300,000 of liabilities, therefore your net worth is $200,000, the difference between the two.
Assets – Liabilities = Net Worth
So now that you’ve calculated your net worth what does it tell you. You can view your Net Worth as a metric that helps you identify your relationship between your assets versus your liabilities. The more assets you have, more than likely the greater your Net Worth is in value.
What are considered assets? Assets are anything that has value, that is either liquid or illiquid. Liquid assets can be easily converted into cash, whereas illiquid assets may take a longer amount of time to make liquid. A liquid asset can be the money in your checking account because it’s already cash. An illiquid asset may take some time to convert into cash, like the equity in your home, artwork or jewelry.
Getting back to what is Net Worth??? This can be viewed as a measurement of wealth, however Net Worth can and is undoubtedly different for everyone. This can involve many factors, like your age, your current job situation, how much money you set aside each month, your mortgage balance, your credit card balances, etc. Seeing where you are financially can help you decide if you’re on the right track of meeting your financial goals or not. It can be a wake up call, especially if you have a negative net worth or a low net worth, especially if you’re getting close to retirement age. That means you have less time to save and accumulate assets so your window of time in increasing your net worth is less than if you are farther away from retirement age.
It’s a good idea to calculate your net work over time. This will allow you to see your net worth growing or becoming less, which could motivate you to improve your net worth by saving and investing more.