The central metric of your personal finance is your personal net worth. All of the advice you receive, from the money tips to any personal loans, should consider this central metric.
Calculating Your Net Worth
The first step to knowing your net worth is to understand how to calculate it.
1. List all of your assets. Assets include homes, cars, retirement savings, all bank accounts and stocks. Smaller assets are usually not included.
2. Estimate the value of any assets that do not have an obvious value, like your home. Kelley Blue Book is a good resource for cars and Accury provides accurate house values.
3. List all of your debts. Any credit card balances that you hold, emergency cash loans, student loans and auto loans are in play here.
4. Simply subtract your assets from your liabilities. The number that you get here is your net worth.
What Does Your Personal Net Worth Really Mean?
After calculating your net worth, you must also understand exactly what net worth means and what it does not. This will keep you from wrongfully applying the calculations that you have just finished.
Your net worth does not give a complete picture of your financial health. You can actually have a negative net worth with a high income and be perfectly fine. The trend line of your net worth is also very important. Is it going up over time, or is it going down? This may be even more important than the actual number that is in your net worth box.
For instance, if you have a net worth of $-50,000, but your income is $100,000 and you have a low interest mortgage and a healthy 401(k), you are doing much better than a person with a $10,000 net worth and a $25,000 salary.
Keeping this in mind, keeping cold hard cash just to boost your net worth can be a mistake. The interest rates in banks are extremely low, and in many cases do not even outpace inflation. Keeping cash in a savings account actually reduces your net worth over time. Compare this to a person who takes his cash and invests it in a business that does not pay off for five years or so. The second person’s net worth is lower today, but it will be much higher five years from now.
It is also very important to consider the depreciation and the asset bearing capabilities of the property that you own. For instance, cars depreciate very rapidly as an asset. They also provide very little opportunity to create more net worth for you. Houses, on the other hand, tend to go up in value over time. They can also be used as an asset creation tool and collateral for personal loans.
Following the best practices above with respect to your net worth will ensure a better financial future for yourself and for your family. Keep your ear to the street for the best practices of the future, because the path to money is always changing!
Ethan founded Goalry, Inc in Dec 2016 with the mission to build the world’s first and only Financial Goal Mall. One place to reach financial goals and comparison shop for any money matter. Taub invents the IP for the finance stores within the mall, while overseeing various aspects of the company. He also has orchestrated the company’s earned media across the finance stores: Accury®, Billry®, Budgetry®, Debtry®, Cashry®, Creditry®, Loanry®, Taxry® and Wealthry®. This includes over 1200 blogs, 400 videos, thousands of social post and publications that have been featured across the web.