A person’s net worth is determined by the amount by which their assets exceed their liabilities. A person’s net worth can be described as the difference between their own and what they owe. When your assets surpass your liabilities, you have a positive net worth. Similarly, if your liabilities exceed your assets, you are said to have a negative net worth. An individual’s net worth is a snapshot of where they stand financially.
If you calculate your net worth today, you will see that it is the total of all the money you have earned and all the money you have spent up until the moment this statement was written. For example, the net worth figure is instrumental, providing a wake-up call when one is entirely off the mark or confirming that one has done well when one is on track. However, keeping track of your net worth over time provides you with a wealthier picture of your financial picture.
Your assets are your belongings valued over a certain amount and can be easily converted into cash. An example of such an asset would be investments, bank and retirement funds, brokerage accounts, real estate, personal property, and money. In addition, some intangibles could be considered assets, such as your private network. In contrast, your liabilities consist of your debts such as loans, mortgages, credit card debts, medical bills, and student loans, among many others. In other words, your net worth is the difference between the value of your assets and liabilities.
Calculating your net worth can be difficult if you do not have correct values for all your assets. When assessing the value of certain assets, it is important to make conservative estimates, so you do not inflate your net worth. Your home is the most asset you own and can significantly impact your financial future. By comparing the value of your home with similar homes in your area that have recently been sold or consulting with a real estate professional, you can determine an accurate net worth for your home. However, there is some disagreement about whether personal residences should be included in the net worth calculation. In the opinion of financial experts, your property’s equity and market value are assets since they may be transformed into cash if you decide to sell.
Despite this, some experts believe that even if the homeowner received cash from the home sale, that cash would have to be put toward purchasing or renting another property. This means that the money received becomes a new liability, namely, the cost of replacing the house. The value of the home being sold may be considered an asset if the home being sold is worth more than the replacement residence.
Importance of Net Worth
Financial trends can be seen in black and white on your net worth statement, forcing you to face your economic reality. Therefore, periodically looking at your net worth statements can help you determine your current financial situation. This can indicate if you are on track, e.g., reducing debt and increasing assets or wake-up calls if you are not.
Some important ways to keep your Net worth on track includes:
- Spend Wisely
Knowledge of your net worth is essential because it can allow you to identify areas where you are spending too much money. Having the ability to afford something does not mean you have to buy it just because you can afford it. To prevent unnecessary debt from accumulating, decide if you are purchasing because you need it or if it is a want before you make the purchase. To limit excessive spending and debt, make sure you buy only what you need. To record all your personal finance, you can also use money management app like Plillionaires which is a pre-seed start-up, that offers the most user-friendly, sophisticated money management app on the market. With Prillionaires you can track and monitor your net worth like a billionaire. You can spend wisely visiting TheMoonTrends to see the latest trend before making purchases.
- Pay Down Debt
A review of your assets and liabilities is an important step you should take in developing a plan for paying down your debt. For example, a person earning 1% interest on a money market account might be paying off credit card debt at 12% interest but gaining 1% interest on a money market account. As a result, you may find in the long run that paying off your credit card debt with cash makes sense. However, if in doubt, crunch the numbers to see if repaying a certain loan makes financial sense, considering the consequences of not having access to that money.
- Save and Invest
The amount of money you have in your net worth might motivate you to save and put money away. On the other hand, if your net worth statement demonstrates that you are on schedule to meet your financial objectives, it might motivate you to keep doing what you are doing in the future. Alternatively, assume your net worth highlights areas where you have room to improve your financial situation.