When was the last time you checked your financial net worth or discussed it with your friends?
Never! And for a valid reason. It is not part of your daily chores.
Knowing your net worth involves knowing your expenditure and obligations. It will help you assess your financial health and establish financial goals.
Why is knowing your Net Worth important?
1. How to Find Net Worth?
Simply put, your net worth is the amount of money you hold minus the amount you owe. It includes more than only equity because it also includes your savings. Your money comprises the bills in your wallet, the bank balance, and the worth of all possessions, such as car, property, precious possessions, investments, and more.
Your debts are the money you owe, including credit card bills, outstanding lines of credit, and any loans you have taken out.
2. Benefits of Knowing Financial Net Worth
Your net worth is significant since it provides 50 percent of the picture of your financial status (the other 50 percent being your monthly income and expenses). Keeping this broader picture viewpoint in mind can help you avoid getting too caught up in the details.
For example, a $1000 unexpected expense may look inevitable, but putting that expense in context with your overall net worth may help you understand your purchasing decisions are not so urgent.
A $1000 bonus can propel you to make your next large purchase. But if you remember your net worth is still in difficulties like debt, think again before making that purchase.
3. What does your Net Worth not tell?
Your financial net worth will not cover many crucial aspects of your life that influence your actions, and it may even mislead others. Even while a student debt may put your financial net worth is negative right now, acquiring the knowledge you need can provide you with priceless chances for personal and financial health improvement.
4. How to Calculate Net Worth?
There is no fixed rule on how often you should do it. Some people like to calculate their net worth quarterly, while others prefer to do so annually. Some financial gurus recommend you recalculate following a big purchase or sale, such as a house or a car.
5. Difference Between Net Worth and Net Income
Working for someone or owning a business is a way to earn income. Your net income is the amount that you have in hand after tax and standard deductions. Standard deductions are social security and 401(k) contributions. Your net income differs from your net worth. Net worth is the total value of everything you own minus all your debts.
Knowing your net worth can serve as a wake-up call if you are financially out of track. A “well-done” for you if you have been doing well. Tracking your net worth over time gives you a more comprehensive picture of your finances. Remember that there is no such thing as optimal net worth, whether you are just starting your career, nearing retirement, or somewhere in between.
Only you can determine if your finances are in the right place.