Do you know what your net worth is? Net worth is the value of the accumulation of things you have reduced by the bills owed. It is a financial tool used to measure how healthy your finances are.
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This is the formula to calculate it:
Assets less liabilities = Net Worth
What is an asset? It is the value of items such as cars, house, bank accounts, etc.
What is a liability? It is what is owed to someone such as a car loan, house mortgage, etc.
In case you’re wondering, yes, something can be in both lists. A house is a good example as it is an asset as what the market value is and a liability if there is an outstanding mortgage amount.
The goal is to have a positive net worth.
Bank – checking
Bank – savings
Credit Union – checking
Credit Union – savings
House – not what price you paid, but instead what the value is if you sold it today. You can see what other similar houses in the neighborhood are selling for.
Car – again, not what you paid for it, but if you were to sell it now, what could you get. In other words, the blue book value which can be found in books like this.
Boat – the value if you sold it now.
Recreational Vehicle – the amount of money it is worth now.
Recreational Vehicle Loans
Credit Card Balances
Figure this each month to get a net worth. While it may be negative, work to get it closer to zero and then ultimately positive.
This provides a good picture at one point in time to analyze your financial status.
How can you improve net worth?
There are two ways:
- Increase your asset
- Decrease your liabilities
It is sort of a balancing act because as you decrease your liabilities you could possibly be decreasing your assets if you use any existing assets like bank accounts to pay down monies due to others.
If you use incoming monies or other ways of saving monies to put towards outstanding monies due, then the assets could stay the same while decreasing liabilities.
How can you increase your assets?
- Get another source of income.
Examples of this can include pet sitting, babysitting, and many others.
- Reduce expenses.
The extra money available by reducing expenses, can be put into savings or paying down liabilities.
- Combination of increasing income and reducing expenses to get the most additional monies. See more information regarding increasing income and reducing expenses here.
How can you reduce liabilities?
There are two thoughts on this.
- Pay the smallest debts (monies due to others) off first.
This philosophy is that it gives you motivation to see one less bill due and then you put the monies you were having to pay this bill monthly towards the next debt. It is also called the debt snowball.
- Pay the debt with the highest interest rate off first. This gives you the benefits of not having to continue to pay the highest interest rate.
You need to feel comfortable with whatever method you choose.
If you need guidance in starting a budget, see this blog post here. This budget binder lets you track your expenses and budget manually. It is a good way to write down all of the money spent each day to see how much even the little items add up.
Figure your net worth by gathering the market values of your assets and the payout of liabilities due. The goal is to have a positive net worth. If it is negative, focus on trying to decrease the negative to zero and then positive. This can be achieved by increasing your assets or reducing your liabilities. This is a great financial check to see where you are and keep you focused on your financial goals.