Why understanding your net worth can set you on a path to building wealth!
To get an overall sense of one’s financial situation, I have found “net-worth” to be a much more meaningful metric than the current annual income. Understanding and tracking/growing this metric allows for better planning and clear potential path to financial independence when you no longer have to be reliant on your paychecks to fund your expenses.
So, what exactly is Net worth! It is the value of all your assets combined (Cash, Investments, physical assets) and then subtracting any liabilities you may have (loans, mortgage, credit card balance etc.).
For example, say Naisha has cash Savings of $40,000 in a high-yielding Savings account, $200,000 across all her retirement accounts, $5,000 in her checking account. She also owns a home that is worth $500,000 (but has an outstanding mortgage of $380,000 on the home). She has a car that is worth almost $12,000 (if she were to sell it) and gold jewelry worth $40,000. She has outstanding balance of $2,500 on her credit card.
So, her Net worth is: $414,500
Please note that in determining your net-worth your current salary does not play any direct role. But if you can wisely use your salary to create “assets” (or reduce liabilities) your net worth will grow! Building substantial net worth should be our top financial priority. This one metric is a very powerful guide to building meaningful wealth over time. Without knowing one’s net-worth it is very difficult to make most financial planning decisions!
You can track this in a simple Google spreadsheet and then update it periodically (say, once a quarter). There are also some online tools that help you track your net worth (eg. Personal Capital) that link with all your accounts and help you track your net worth in an automated way!
