The net worth is the difference between i.e. your assets, and what you owe i.e. your liabilities. It is a quantitative measure of your economic status.
How to Calculate Net Worth
An asset is anything that is owned and has monetary value. In order to calculate one’s net worth, one has to first establish the value of their assets for example a car, real estate, stocks and securities, savings account, cash, retirement account, valuables such as jewelry and art.
Liabilities are obligations that deplete resources. It’s what you owe. One also needs to calculate the value of their liabilities for example mortgages, car loans, student loans, balance on credit cards.
Once you have established the value of total assets and total liabilities, subtract the total liabilities from total assets.
Positive vs Negative Net Worth
Positive net worth means that the value of your assets exceeds that of your liabilities. This is good as it indicates good financial health.
Negative net worth means that the value of liabilities exceeds that of assets. This is a cause for concern as it may indicate a decrease in assets relative to liabilities.
Importance of knowing your Net Worth
- Clear picture of current financial situation: Knowing your net worth gives you a very clear picture of just what your financial situation is. It gives an accurate image of your current financial status.
- Value of assets and Liabilities: Your net worth uses the value of assets against the value of liabilities. This helps you understand the value of both.
- Notify of any improvements: Your net worth will help you see whether there are any improvements that you may need to make, in terms of spending habits.
- Keep track of Trends: Ideally, as you continue to age, your net worth should continue to grow. By tracking your net worth, you will be able to see a trend in the growth, be it positive or negative, and make adjustments accordingly.
- Planning purposes: Your net worth can be used as a planning and budgeting tool in one’s finances.
- Wise spending habits: By tracking your net worth, you are able to manage your expenses better and therefore have better spending habits.
- Save and Invest: It allows you to know how much money you have for saving and investment purposes.
How To Increase Your Net Worth
- Pay Off Debt: Your liabilities reduce the value of your assets. Reducing your debt, reduces your liabilities which in turn increases your net worth.
- Invest in financial markets: The stock exchange allows one to buy various stocks and securities that earn one returns. This added income will increase one’s net worth.
- Reduce unnecessary spending: By reducing one’s expenses and unnecessary spending, one has access to more funds. Therefore an increase in your net worth.
- Getting a raise: If one is in formal employment, one may consider asking for a raise.
- High interest savings account: One should try to find a savings account that attracts the highest possible interest rate as this will increase the value of your savings and therefore increase net worth.
- Alternative sources of income: One can also try to engage in various activities to earn them income i.e. side hustles