Net Worth is so crucial to understanding our current financial situation. It can tell us where we are suffering and need improvement or exactly where we stand with our finances. It is essentially a report card of our money. This is the compass that will help you figure out what you need to do in order to reach our financial goals. You will either receive a much-needed wake-up call or pat on the back feeling that you’re on track.
So what is net worth? Why is it so important? Why am I asking so many questions? Why can’t I stop?
The math is very simple. Net worth is your assets minus your liabilities. The overall goal is to pay down your liabilities and increase your assets. Creating a strategy to accomplish this will most likely help you find long-term financial success.
Understanding Assets
Assets are anything of positive value in your life that may be liquidated into a profit in the future. This could include real estate, retirement accounts, cash, stocks or a business. All these items add up to your total assets.
The key to achieving true financial independence is to master your assets. We need to build up our assets to support ourselves financially and work for us. Stocks are a great example of helping us get there. 401k’s, dividends and other forms of investments accrue interest and grow over time, slowly building up our total assets. Continue contributing to your portfolio and over time your money will grow, even while you are sleeping.
Understanding Liabilities
Liabilities or debt can either be a great tool to support long-term financial success or it can ruin you. No pressure. It has the potential to set you back years in achieving true financial independence and is a tough cookie to beat.
But not all liabilities are bad. Student Loan Debt, for example, is a great debt to have. You spent money to open opportunities to build more assets for your future. You increased your future earning potential and basically invested in yourself, which is very important.
You should always look at debt in this way. The money you take on, as debt should always be used in a way that will see a return on the investment greater than the debt itself. Basically the future return on what you spend the money should be more than the loan you took out.
If you are building a balance on your credit cards with high interest rates, you are most definitely not earning more in return. Remember to find ways to use debt that will leverage more money in the future.
Home ownership is another great example good debt. You are taking out a mortgage to purchase something that will optimistically return a much greater profit.
Managing your liabilities can greatly accelerate your growth in assets and your net worth. However, be cautious of overleveraging and using debt the wrong way. That could really negatively impact you and your future net worth.
How to Improve Your Net Worth
So we know what assets and liabilities are, but let’s now shift over to cash flow. Cash flow is basically what’s coming in each month. It’s such an important tool to building our net worth and getting us closer to financial independence.
The goal is to properly allocate your cash flow month to month, which will be a positive improvement on your personal balance sheets.
Let’s say you bring in $10,000 a month after taxes and 401k contributions. After expenses and a mortgage you’re left with $5,000. This is money that can be used towards your financial goals. That can include paying down debt, saving for a down payment on a home or anything else.
With that money is so easy to blow it on just one thing. But properly budgeting that in a more efficient manner can greatly improve your financial situation. You can use a percentage of that to pay down some student loan debt. Then use the rest to work on your emergency fund and long term investing. Finding the key areas to focus on are what help you create a strong positive net worth.
Having this transparency with your finances is what helps you align your monthly cash flow with your financial goals. It will build a solid foundation for increasing your net worth and creating true financial independence.
What Does This All Mean?
The end goal is determining if your net worth is large enough to support your desired lifestyle. If you ever want to retire, you need to make sure your finances can support such a move and keep you financially stable for all those years.
The first step is actually figuring out what your net worth it. Much like when figuring out your total debt owed, it’s like ripping off a band-aid and adding it all up.
For your assets, add in all of your bank accounts, retirement funds and any other assets you may own. Some don’t like to include personal homes, but I like to since I consider it’s still considered an asset.
Then add up all your liabilities. Include any student loan debt, credit card debt, mortgage and anything in between.
What is the difference? Are you in the positive or negative? Use this as your starting platform towards gaining financial independence. Is it in the negative? That just means you need to place more focus on lowering your liabilities. Pay down some of your debt and work towards that positive number.
Are you in the positive? Great! Same advice. Continue paying down your debt and also work on increasing your cash flow. Keep adding to your assets through smart investments and retirement contributions.
If you’re like me, you often get competitive. Seeing my debt amount get lower month over month became almost addicting, trying to “win the game” and get it to 0. Seeing progress is such a great feeling. Tracking your net worth is very much the same thing. You can treat it like a game almost, seeing how low you can make your liabilities and increase your assets. Hitting milestones like reaching positive net worth or even 6 figures are goals that can really inspire you to keep going.
The end result is finally achieving the means to live the life you want on your own terms and using money as a tool to achieve that.
