What is my net worth? That is a question that has probably come to your mind if you are concerned about your financial health. Calculating this number may sound like a lot of complex equations you used to learn at school. Well, it’s not quite like that. It is much easier than you might think.
Keep reading to find out how to determine your net worth and how to use it to ensure your financial stability.
What is net worth?
Net worth is the monetary value of your liabilities deducted from the sum of all your assets. It can help you measure the value of the things you own and the kind of financial obligations you can face.
Net worth has two different types. It can be applied in:
Personal finances
Net worth in personal finances is what we talked about before: subtracting liabilities from assets. The liabilities can be debts like a mortgage, a car loan, a student loan, or your credit card pending balance. On the other hand, assets are everything you own.
Business
Net worth in a business is represented in a balance sheet. It works the same way; it is the difference between the liabilities and the assets. Potential lenders look at its net worth statement when a company looks for credit to expand its business.
Generally speaking, if the amount of liabilities of the company is greater than the total assets, the lenders will not trust its ability to pay back the loan.
What is my net worth?
Let’s make up an example to understand it better.
Once you start your adult life, you find yourself in the middle of several money transactions. You earn the monthly salary from your job, spend it on things you like, and take loans to afford a nice car and your dream house. At this point, you may be wondering: “What is my net worth after all?”.
To figure out your net worth, first, you need to sum up the value of your assets. For example, let’s say that you bought a car worth $50,00, a house valued at $200,000, and the rest of your possessions and investments sum up to $75,000. This means that the total value of your assets is $325,000.
Now, let’s analyze your liabilities. Between your pending student loan, mortgage, and the loan for your car, your debts equal $320,000. Finally, you’ll get your net worth by calculating the difference between your assets and your liabilities. In this particular example we created, your net worth is $5,000.
How to increase your net worth?
If you want to increase your net worth, here are some tips that’ll probably help you.
- Pay your debts: Paying off all your debts as soon as possible is one of the best ways to increase your net worth. You’ll have fewer liabilities to worry about.
- Keep your money where it’ll grow: Having your money in your savings account is a good option, but have you thought about investing? Invest in what you can. Maybe try passive investing; you don’t need to have much experience to do it.
- Buy a car for life: When you purchase a new vehicle, make sure it is the one you’ll be most comfortable with within the long run. Buying a new car probably means you’ll get some debts (unless you have learned how to become a millionaire).
- Keep enough money in your emergency fund: Emergencies can happen at any time. Sometimes they happen when you least expect them. An emergency fund will help you to be financially prepared for these situations, so you don’t have to rely on loans or your credit card.
The takeaway
To recap, we found an answer to the common question: What is my net worth?
You need to calculate the value of your liabilities and subtract it from the total value of your assets. This way, you’ll know what types of economic obligations you can face. It can help you take more control of your finances and ensure a financially stable future.
Make sure to check out the rest of the articles in our library to learn more about your finances and investments.
