Most people don’t see calculating their net worth as particularly important. As long as you know you can pay your bills, you may not be concerned about how much you’re deemed to be worth in terms of financial planning. However, knowing your net worth is more important than you realize.
Net worth is a popular measure of wealth, but what does it mean, and why should you care? There is no such thing as a “perfect” net worth. Even the concept of a “good” net worth differs significantly from person to person. Tracking your net worth over time, on the other hand, can be a powerful tool for assessing your financial health.
Your net worth represents a snapshot of your current financial situation. If you calculate your net worth today, you will see the sum of everything you’ve earned and spent up to this point.
What Does Net Worth Tell You?
Your net worth is the amount by which your assets exceed your liabilities, or what you have versus what you need to pay off.
Assets include investments, bank accounts, mutual funds, retirement accounts, property investment, and personal possessions.
Your mortgage, loans, credit card debt, student loans, and other debts are all liabilities.
Knowing your net worth, regardless of your financial situation, can help you evaluate your current financial situation and plan for the future.
Your net worth will fluctuate; however, the overall trend is important; as you age, your net worth should ideally grow.
If you’re doing well, you might discover that you can continue living like what you know now with confidence. When calculated regularly, your net worth can be viewed as a financial report card that allows you to see how you’re doing financially.
How do I calculate my net worth?
Your net worth is calculated by adding the dollar amounts of all your assets and subtracting the dollar amounts of any liabilities. Assets are any possessions that have a monetary value. Checking and savings account balances, the value of investment accounts, real estate property values (including your home), and the market value of any automobiles or other valuable possessions are all included. Liabilities are also referred to as debts. These include outstanding mortgages, car loans, student loans, and credit card balances.
After you’ve calculated everything, it all comes down to one number: your net worth. It is your current personal worth minus your liabilities if your net worth is positive, congratulations! It means that your previous financial decisions have resulted in an improvement in your financial situation. You may have made good real estate investments, or you may have been able to mitigate losses in your stock market investments, or your new business investment may have paid off.
If your net worth is negative, it depicts your financial situation, indicating that you have unmet financial obligations that must be addressed. These could be debts incurred due to high mortgage payments, tuition fees, or expensive hospitalization or medical treatment. The solution is to reduce debt and expenses, which usually necessitate changing your daily routine.
Why is Your Net Worth Important
When you see financial trends in black and white on your net worth statements, you are forced to face the facts of your financial situation. Reviewing your net worth statements over time can help determine where you are and how to get there.
1.It will assist you in keeping your debt-to-income ratio under control.
Your net income is a good place to start when calculating your debt-to-income ratio, but your net worth will also provide you with the debt portion of the equation. If your debt is increasing every time you check your net worth, your DTI is likely increasing as well. While rising debt is typically bad in and of itself, it may also hurt you if you’re looking to buy a home or investment property, as it is a crucial qualification metric.
2.Spend with Discretion
Knowing your net worth is important because it can assist you in identifying areas where you are overspending. You can buy something if you can afford it. To avoid unnecessary debt accumulation, consider whether something is a need or a want before purchasing. Your needs should account for most of your spending to reduce unnecessary spending and debt.
3.Set additional Goals
Financial planning is not a one-time event. Instead, it is a lifelong process that should be updated regularly. As you achieve one financial goal, you should set another. Tracking your net worth can help you see how you’re doing about your financial goals and can also help you set new ones.
Your net worth figures can inspire you to save and invest. If your net worth statement shows that you are on track to meet your financial objectives, it can encourage you to keep going. If, on the other hand, your net worth shows room for improvement, it can provide the spark of motivation you need to take a more aggressive approach to save and invest your money.