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Most of the time conversations around net worth are preceded by a certain celebrity’s name. I, myself, just engaged in a debate discussion about Shawn Carter’s (Jay-Z) net worth and whether or not he is truly a billionaire.
What we really should have discussed was our own net worths, why it is important and how to increase them.
What Is Net Worth?
Net Worth is your assets (everything you own) minus your liabilities (everything you owe).
Your net worth can be positive, you have more assets than liabilities or it can be negative, more liabilities than assets.
Your net worth is a figure of your financial health and it is a true measure of wealth because it tells you what is left after you pay off everything you owe.
Why Does It Matter?
Your net worth gives you a snapshot of where you are financially at any point in time, shows your progress toward your financial goals, keeps a tally of how much debt you have and show you how close you are to achieving financial independence.
How To Calculate Your Net Worth?
To calculate your net worth you first need to add up the value of all of your assets. Your assets will include:
The balance in your checking, savings, investments (such as brokerage accounts) and retirement accounts.
Value of bonds or treasury bills
Value of your real estate investments, including the value of your home if you own ( if you’re not sure, check Zillow for the approximate market value
Value of any cars, and/or recreational vehicles you own
Value of any precious jewels (jewelry)
The value of your business, if you own one.
Any personal items of value, like an art collection.
Now add up all of the assets you have listed. This number is your total assets.
Next, you need to list all of your liabilities, what you owe, and their balances. Which includes:
Your credit card and personal loan balances.
The amount you owe on your home and any other real estate.
The amount you owe on your cars and/or recreational vehicles.
Your student loans balances.
Your medical debt and any money you owe to other people.
Total up all of the liabilities you have. This number is your total liabilities.
Now subtract your total liabilities from your total assets to get your NET WORTH.
At this point, you will either have a positive or negative net worth.
Here’s an example calculation of net worth for Kim & Tosha
Total Assets:$ 25,000
Total Liabilities $ 35,000
$25,000 - $35,000 = ($10.000) - Negative Net Worth
Total Assets: $185,000
Total Liabilities: $92,000
$185,000 - $92,000 = $93,000 - Positive Net Worth
Don’t Be Concerned With A Negative Net Worth
If you have a negative net worth you do not be concerned, depending on what stage in life you are in you may have a negative net worth, for example, a recent graduate may not have any assets or a low number of assets and they have student loans.
That person may have a negative net worth, whereas, a person who is a few years older and owns a home or has started saving for retirement and investing may have a positive net worth.
Ways To Increase Your Net Worth
There are several ways you can increase your net worth.
The easiest ways are to:
Reduce Debt - By reducing what you owe your net worth will increase but you will also have more disposable income to put towards your financial goals. You can start reducing your debt by tracking your spending and creating a budget that focuses on paying off your debt.
Spend Less Than You Make - the easiest way to do this is to automatically save money by paying yourself first. Building up your savings and your emergency fund will increase your total assets and it will give you the options when an unexpected situation or an opportunity comes up.
Invest - This includes your retirement. By investing more you have the opportunity to increase your net worth but also save for retirement years. Investing may allow you to increase your assets faster than a standard savings account.
How often should you calculate your net worth?
I prefer to calculate my net worth on a monthly basis when I complete my financial checkup.
Completing it monthly allows me to see where I stand when it comes to achieving my debt pay off goals. It also helps me see if I am on track to reach my retirement and investing goals.
So the next time you and your friends start discussing a celeb’s net worth, ask them when was the last time they calculated theirs and let them know what your net worth is. It’s time we start helping each other get to the next level.