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Why Your Net Worth Is the Most Important Number You Aren’t Tracking
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Most people know their salary, monthly expenses, and maybe even their savings—but do you know your income? net worth? If not, it’s time to start paying attention. Your net worth is the ultimate measure of your financial health and shows you exactly where you are.
Think of it as your financial scorecard: the difference between everything you own and everything you owe. A positive net worth means you’re ahead of the game, while a negative net worth means you still have some work to do.
Tracking your net worth isn’t just about getting a number, but watching how that number changes over time, giving you a clear idea of whether you’re moving closer or further away from your financial goals.
Main points
- Your net worth is the amount your assets exceed your liabilities, or the amount you own versus the amount you need to repay.
- Assets include investments, bank accounts, brokerage accounts, retirement funds, real estate, and personal items such as cars or jewelry.
- Liabilities include your mortgage, loans, credit card debt, student loans, and any other debt.
- Regardless of your financial situation, knowing your net worth can help you evaluate your current financial situation and plan for the future.
- Your net worth will fluctuate, but it’s not the daily value that matters, but the overall trend; as you age, your net worth should ideally grow.
- By understanding your financial health, you will be more mindful of your spending, better prepared to make smart financial decisions, and more likely to achieve your short- and long-term financial goals.
What your net worth can tell you
Your net worth can tell you a lot. If this number is negative, it means you owe more than you own. If this number is positive, you have more money than you owe. For example, if you have $200,000 in assets and $100,000 in liabilities, your net worth will be positive $100,000 ($200,000 – $100,000 = $100,000). Conversely, if your assets equal $100,000 and your liabilities are $200,000, your net worth will be negative $100,000 ($100,000 – $200,000 = -$100,000). Negative net worth doesn’t necessarily mean you’re financially irresponsible; it just means that – right now – you have more liabilities than assets.
Because everyone’s financial situation and goals are unique, it’s difficult to establish a universal “ideal” net worth that works for everyone. Instead, you must determine your ideal net worth—where you want to be in the near and long-term future. If you don’t know where to start, some people find the following formula helpful in determining “goal” net worth:
target net worth
=
(
your age
–
25
)
*
(
1
5
*
total annual income
)
\text{Target Net Worth} = \left(\text{Your Age} – 25\right)* \left(\frac{1}{5}*\text{Total Annual Income}\right) target net worth=(your age–25)*(51*total annual income)
For example, a 50-year-old with annual gross income of $75,000 might have a net worth goal of $375,000 ((50 – 25 = 25) × ($75,000 ÷ 5 = $15,000)). This doesn’t mean that all 50-year-olds should have the same net worth. This formula can simply be used as a starting point. Your ideal net worth may be much higher or lower than the amount shown in the guide, depending on your lifestyle and goals.
Track your net worth
When you see financial trends in black and white on your net worth statement, you’re forced to face the reality of your financial situation. Reviewing your net worth statement over time can help you determine 1) where you are now, and 2) how to get where you want to go. This can give you encouragement when you’re moving in the right direction (i.e., reducing debt while increasing assets), or a wake-up call if you’re not on track. on track May include the following:
spend money wisely
Knowing your net worth is important because it can help you identify areas where you spend too much money. Just because you can afford something doesn’t mean you have to buy it. To prevent debt from accumulating unnecessarily, consider whether something is a need or a want before you buy it. To reduce unnecessary spending and debt, your needs should represent the majority of your expenses. (Remember, you may mistakenly rationalize a want as a need. That $500 pair of shoes does satisfy a need for footwear, but a less expensive pair may be enough and move you toward moving in the right financial direction).
pay off debt
Reviewing your assets and liabilities can help you develop a plan to pay off your debt. For example, you might earn 1% interest in a money market account Also pay off your credit card debt with 12% interest. You may find that using cash Pay off credit card debt It makes sense in the long run. When in doubt, crunch the numbers to see if paying off a particular debt makes financial sense, taking into account the impact of no longer having access to that cash (which you might need in an emergency).
Savings and investments
Your net worth number can motivate you to save and invest money. If your net worth statement shows that you are achieving your financial goals, it can encourage you to keep doing what you are doing. Conversely, if your net worth indicates room for improvement (e.g., your assets are decreasing and your liabilities are increasing over time), it can provide the motivation you need to take a more active approach to saving and invest.
bottom line
Your net worth is the amount your assets exceed your liabilities, or more simply, the amount of assets you own versus what you owe on them. Knowing your net worth can help you evaluate your current financial situation and make plans for the future.
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