Your net worth offers a clear picture of your overall financial health. Understanding what net worth means is important regardless of how much money you make.
Knowing your net worth is valuable for several reasons, the most important one being that it can enable you to evaluate where you are in your financial journey. Net worth is about more than just how much money you have in the bank, and it is based on a number of factors. If you’ve been wondering what net worth is all about and how to calculate it, then read on to find out.
Defining Net Worth
So, what does net worth mean? A simple way to determine your net worth is to calculate how much your assets are worth and subtract that by how much debt you have. For example, assets would include your homes and investments, while debt would include things like loans. While your net worth may seem static, it will likely change over time, and there are several things you can do to improve it—both in the long- and short-term.
Net worth is determined by adding up the assets you own free and clear, such as your home or other real estate, investments, bank accounts, and vehicles that do not have a loan/lien.
Once you have added up the value of your assets, you can then subtract your debts, including credit cards; mortgages; and personal, medical, and/or vehicle loans.
All asset and debt valuations are based on the current market value. The total after subtracting your debts from your assets is your net worth.
Reducing Your Debt
Once you understand how to determine your net worth, the next logical step is to figure out how you can increase it. While there are several strategies that you can use to facilitate progress on your financial journey, getting rid of debt tops the list.
When you owe money to a creditor, you will likely be charged interest and will be obligated to make regular payments until the debt is repaid. This not only impacts your day-to-day finances, but it can also affect you long into the future. Money spent on paying down debt could be better allocated to something that will help you to grow your finances, such as investments. For smaller debt, which could encompass low credit card balances or vehicle loans that are almost paid off, you might consider adding more to your regular payments until the debt is paid off. If you have a lot of debt, such as considerable student loans or medical bills, a consolidation loan is a way to tackle these at a lower interest rate that will help you to pay them off faster. If you have been relying on credit cards, make an effort to avoid using them for anything other than a genuine emergency.
Reducing your expenses is another way to improve your net worth. This is the conventional advice for anyone who wants to improve their finances, and the same advice applies when it comes to net worth. If you don’t regularly track your expenses, consider writing down how much you spend over the course of a few weeks to get a better idea of how you spend your money. If writing down your expenses seems too time-consuming, then try a budgeting app or your bank’s online banking website to determine exactly where your money is going. Even if you don’t think that you engage in unnecessary spending, looking at what you spend may reveal areas that could use improvement.
Other ways to improve your net worth include increasing contributions to your retirement account, taking advantage of pre-tax deductions at work, and putting your money into an interest-bearing savings account.
Consider Working with a Financial Advisor
Depending on your situation, speaking with a financial advisor may be a good idea. For some people, it may seem overwhelming. Others are reluctant to talk about their finances with a stranger. However, speaking with a financial advisor or accountant can help you to objectively assess your finances and to come up with a plan to increase your net worth. A financial advisor will provide insight and strategies that can allow you to leverage your assets and reduce your debt.
Building Your Net Worth Takes Time
When building your net worth, it is important to keep in mind that results will not happen overnight. If you have a lot of debt and few assets, it could take longer for progress to occur, but it will happen eventually. Confronting your finances head-on and making a financial plan you can stick to will help you on the path toward achieving high net worth, but patience is required throughout the process. A financial advisor can help you to manage your net worth and to take the first steps toward improving your financial future.