When you think about your net worth, you probably think of it as a measure of your money. That’s partially correct. Your net worth is your total financial worth; your net worth is essentially the amount of money you have left over if you sold everything you own and paid off all your bills. But while this may seem like a pretty straightforward calculation, calculating net worth isn’t quite that simple.
You might think your net worth has nothing to do with you, but it does. That’s because having a low or high net worth can significantly impact where and how you live.
So, what is net worth?
In simpler words, it’s what’s left over after you’ve counted up everything you own and then subtracted everything you owe. If you have $100,000 in assets and $40,000 in liabilities, then your net worth is $60,000. You could also say that it’s the worth of your assets less the value of your liabilities. This is useful to know because having a high net worth is a sign that you’re financially savvy and financially comfortable. On the other hand, having a low net worth can be a sign that you need to do some serious financial house cleaning.
What’s the difference between your net worth and your financial health?
Simply put, net worth is a single number that indicates your financial health. Your net worth is not an indicator of the quality of your life or your standard of living. It simply reflects one’s financial health and ability to accumulate wealth. With that said, high net worth does not necessarily mean a happy and healthy life. While financial health is essential, it’s not the primary success factor. In fact, you can have a high net worth but be trapped in a life of financial uncertainty and low income.
Finding your net worth
If you’re not sure how to find your net worth, start by listing all of your assets and liabilities. Then, subtract one from the other. If you have a net asset of $80,000 and a net liability of $30,000, your net worth is $50,000. Now don’t freak out. Your net worth doesn’t tell you how much money you have or don’t have.
It’s important to note that assets include your home, car, stocks, and retirement accounts. Some calculators also allow you to include your spouse’s or children’s assets and subtract your dependents’ liabilities. For example, if your health insurance plan covers your child, include that amount when calculating your net worth. If you don’t, you’re likely to undervalue your net worth.
Don’t sweat it if your net worth is lower than you’d like it to be. If you’re feeling anxious, try taking a deep breath and then write down your net worth on paper. This will help you relax and get your head around the thought that your net is just one piece of your financial puzzle and not the big picture.
3 steps to increase your net worth
Before budgeting, debt repayment, and financial planning, take a step back and check your net worth. If your net worth is $60,000 and your desired net worth is $100,000, you’re in good shape financially. You can write down a few things that will increase your net worth and get you closer to your desired net worth.
- Cut down your non-asset building expenses
When it comes to building wealth, it’s not just how much you earn that matters. It’s also how you spend your money. The first step to growing your wealth is cutting your non-asset building expenses. Focus on investments that increase your revenues, and help build assets.
If you’re serious about building wealth, then certain expenses in your life must be reduced or eliminated. These expenses don’t develop your assets but take away from them. Here are some common non-asset building expenses that many people spend their money on:
- Unused gym memberships
- Coffee shops
- Dining out with friends and family
- Traveling (unless it’s a work-related trip)
- Invest in passive income opportunities
Passive income is the holy grail of wealth building. It’s what allows you to build a business that doesn’t require your presence, and it’s the main reason so many people are drawn to online business opportunities.
There are many options out there, but below are some of the most popular:
- Creating online stores
- Selling ebooks and courses
- Affiliate marketing
- Rental properties
That doesn’t mean passive income is completely hands-off, though. It does require some maintenance work from time to time — or hiring someone else to handle it for you — but nothing too intense.
- Pay off high-interest debt ASAP
High-interest debt is a drag on your financial health, and it’s important to pay it off as soon as you can. But the trouble is that many people have multiple forms of high-interest debt, often from different sources.
It’s imperative to eliminate these debts. Why? Because they’re costing you a fortune in interest payments that could be used to grow your business or personal net worth. It may be difficult to prioritize which debts you should tackle first.
To help reduce your debts, we recommend using the debt snowball method. With this method, you list all your debts from smallest to largest and focus on paying off the smallest ones first. Then when you’ve paid off a debt, you use the money you were paying on that debt to pay down another one — and so on until all of your debts are gone.
We recommend counseling with a financial consultant to help determine the most urgent or toxic debt to focus on reducing or eliminating.
Use a tool to track your net worth
Once you have a rough estimate of your net worth, it can be helpful to track your progress over time. A simple spreadsheet or budget tool can help you stay on track and stay focused on your financial goals.
The way forward
Your net worth is just one number and an excellent way to track your progress, but it’s not the only way to measure your financial health. If you feel like something is off, don’t be afraid to seek help. Bernd Financial provides the best financial consulting solutions for business and personal cash flow and wealth management. We specialize in helping you set goals, manage debt and develop a budget that works for your lifestyle. Our experts will meet with you to discuss your goals and objectives. Then we’ll walk you through how we can help you achieve those goals by providing unbiased advice and tailored recommendations for your needs. Schedule your free initial consultation appointment today.