We always read on business sites about the net worth of famous people, which indicates who is the wealthiest in the world.
Hence, the notion that the term is only applicable to affluent personalities, like those who head big companies like Amazon’s Jeff Bezos or Berkshire Hathaway’s Warren Buffett – but have you ever thought of knowing what’s yours as well?
Despite the common misconception, there are more than the numbers we often see: savings, retirement accounts, and even investments – the net worth is an important indicator of how well you are in building your assets for the future.
Heck, some people don’t even know what that is – net worth is the value of all your assets or basically everything that you own like cars, houses, lots, cold cash, retirement and savings accounts, and other physical valuables such as jewelry and art subtracted with any long-term debts such as student loans, credit card balance, mortgages, other loans, and liabilities.
So to put it bluntly, calculating your net worth is done by subtracting what you owe to what you have.
Importance of Knowing Your Net Worth
Did you calculate your net worth? Exencial Wealth Advisors CFP Daniel Routh explained that most likely, when you’re under 40, it’s going to be negative, but there’s no need to panic because this is just ordinary and there’s definitely nothing to be scared of.
Thus, the first importance of determining your net worth is so you will know how well your financial health is.
You will basically know what your financial situation is and coming face to face with the hard truth, presumably listed in black and white statements, you’ll know where you are headed.
Second, knowing where you financially stand at this point in your life will only ignite a sense of consciousness with your spending and saving habits.
Admit it, seeing how you have so many debts than savings can be a little tear-jerker and most people can be at a loss for words, but this could also inspire you to make wiser decisions henceforth.
After all, experience is the best teacher and knowing that you have a negative net worth, you’ll do the best you can to make it into a positive number and eventually, to make that figure balloon.
Finally, you will definitely understand how to prioritize which debts need to come first. Start paying off your liabilities, but begin with those rates that you are paying with borrowed cash and follow this with the ones that have the highest interests like credit cards before relatively lower interests like student loans.
How to Increase Your Net Worth
As per Bankrate, credit card rates have a record high of 17 percent on average, while student loans range from 5.05 percent for direct loans for undergraduates and 6.6 percent for direct unsubsidized loans for professional students and graduates.
Routh also noted that you can lower the student loan rate when you refinance, and substantially even drop it down to about 3 or 4 percent.
You can now start increasing your savings with a couple of sacrifices: contribute to a 401(k) if it is offered by your employer because even if it hurts to lessen the money you can use probably for your lavish wants, it will definitely go to something useful in the long run.
This goes without saying that you need to cut on the expenses, especially with hobbies and habits that you don’t need. Just always think that the lesser you spend, the higher your net worth will be.
If you are not eligible for a retirement savings plan, you can always opt for a Roth IRA or individual retirement account, a much-flexible choice.
Your contributions, which will grow without tax, can be withdrawn any time without a corresponding penalty.
Revisiting Your Net Worth
Essentially, when you make efforts on saving and minimize spending, you’ll notice that your net worth will start to rise.
That said, it is important to not be hard on yourself and note changes and progresses to further motivate you in upping the number.
Essex Financial certified financial planner Michael LaRiviere suggests that people check and see which goals were met in the past year.
Moreover, you should also revisit your net worth and know if it went higher or not so as to know if you need stricter spending measures or not.