Net worth is a familiar term, but you may not calculate or watch it in the same way you track your income. Yet net worth is a valuable measurement tool for overseeing your financial success.
In a nutshell, net worth is total assets less total liabilities, such as debts. Here’s an example. Say your assets consist of your home, vehicle, a savings account, and your retirement accounts, all of which total $515,000. Your liabilities, including a mortgage, vehicle and student loans, and credit card debt, total $275,000. Your net worth is $240,000 ($515,000 – $275,000).
What does that tell you? Positive net worth can indicate you have sufficient assets to handle emergencies, though you’ll need to drill down a bit more deeply to your liquid net worth to make sure you can successfully navigate unforeseen events. Liquid net worth is the amount of assets you can easily access, such as checking accounts, or quickly turn to cash, such as certificates of deposit.
While a one-time snapshot of your net worth can be useful, such as when you apply for a mortgage or other loan, consistent monitoring gives you the ability to detect trends, both the good (decreasing liabilities) and the worrisome (increasing liabilities). A continual climb upward indicates your financial plan is on track. A steadily decreasing net worth is a signal that you need to make corrections. The goal: Positive growth over time.
You’ll also want to review the asset and liability pieces of your net worth separately. In general, you want your assets to steadily increase, and your debt to decrease. Opposite trending should set off warning bells.
Net worth can provide other useful measurements of your financial progress as well, such as work hours required per incremental increase in your net worth, and the time between incurring debt and paying it off.
For more tips and suggestions about calculating, analyzing, and increasing your net worth, contact us.