There are many things individuals should know about themselves. Your credit score, financial situation and your savings goals are all things that everyone should be aware of. Another important category to add to this list, in order to get you in good financial standing, is to know your net worth.
- Assets: anything you own that can be converted into cash.
Examples: real estate, personal property, cash, etc.
- Liabilities: representation of your debts.
Examples: loans, mortgages, student loans, credit card debt, medical bills, etc.
- Net worth: the different between the total amount of your assets and liabilities.
Example: assets – liabilities = net worth
Your net worth is how much your assets surpass your liabilities. In more simple terms it is the difference between the amount you own versus the amount you owe. When your assets exceed your liabilities then you have a positive net worth whereas alternatively, if your liabilities exceed your assets then you have negative net worth.
Your net worth is what shows you your financial status at this point in time. When you commit to sitting down and calculating your net worth, you will be able to see everything that you have earned as well as everything you have spent up to the current date. This is helpful to give you an overall idea of how well you are doing with your finances. Either you will rest easy knowing you are right on track or realize you need to get in gear, get your budget in check and get back on track.
It is best to get an overall view of your finances as well as periodical perspectives. Your periodical calculations of your net worth can be a guideline to tracking your current financial health. By knowing where you stand financially you can then decide what steps need to be taken in order to reach your financial goals.
Issue when calculating net worth:
- It may be difficult to assign accurate values to all of your assets. When doing so it is important to make modest estimates when assigning values to your assets to avoid exaggerating your net worth. This will end by having an unrealistic view of your affluence.
Just because you have a negative net worth does not automatically mean you are careless with your finances, it might just mean that, at the current moment, you have more debts than assets. Like many things, your net worth will vary on a regular basis. Ideally, your net worth will grow as you grow. As you pay down your debt while acquiring more assets you will build your net worth.
No matter where you are at financially in your life, your net worth is a great way to evaluate your current financial situation as well as commencing to make financial plans for your future. Being aware of your financial situation alongside a realistic budget you will be better equipped to manage financial decisions, more aware of your financial activities and on the right track to achieving financial goals.