Want to know how well you are doing financially? Don’t just look at your salary or how much you have in your savings account. According to financial experts, the true yardstick for wealth is “net worth.” This number gives you a complete picture of your finances and helps you determine your current financial state. It’s also useful in planning your money goals and tracking your financial progress over time.
What is Net Worth?
Net worth represents how much you are worth if you sold all your assets and paid off all your debts. It is simply “what you own minus what you owe.” Most of the time, we only encounter the term when we read about billionaires or high-profile executives. But even if we’re not part of that club, we should still take the time to know our net worth.
Assets and Liabilities
Before we can compute our net worth, we have to be familiar with two concepts first. The first one is Assets. Anything that you own that has monetary value can be considered an asset. Here are some that you can include on your list:
- Income – your take home pay plus other cash benefits you’re getting from work
- Cash on Hand – any currency of paper bills and coins that you have
- Bank Funds – money that you have in a bank account like savings, time deposit, etc.
- Investments – stocks, bond funds, mutual funds, and other investment vehicles you might have
- Vehicles – the resell value of the vehicles you own (car, motorcycle, etc.)
- Real estate – the market value of properties you own (house, apartment, condo, etc.)
- Personal Valuables – includes the cash value of jewelry; collectibles like paintings, sculptures, antiques, vintage stamps, etc.; furniture
- Money You Are Owed – money that friends or relatives borrowed from you, as long as you can ensure that you will be paid back
The second concept is Liabilities. This is basically anything you owe to someone else, like debts or payments. The most common liabilities are:
- Credit Card Debt – the outstanding balance on your credit card
- Car Loan – the amount that you have yet to pay for your car or other vehicles
- Home Loan or Mortgage – the amount you have yet to pay for your house, condo, or other properties
- Personal or Salary Loans – the remaining payments for loans you availed from a bank or a government institution like SSS.
- Insurance – the remaining premiums you have to pay for your policy.
- Money You Owe or Utang – money that you borrowed from friends or relatives that you have not paid yet
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Net Worth Formula
After you’ve listed out all your assets and liabilities, it’s time compute for your net worth. Here’s a simple formula that you can use:
Net Worth = Total Assets – Total Liabilities
The final number can either be positive or negative. If you have a positive net worth, congrats! Give yourself a pat in the back because your finances are in good shape. If your net worth is negative, don’t fret. There are ways to pull up your number back to the green zone – it just takes a little discipline and some proper money management.
Tips for Increasing Your Net Worth:
Your net worth is a snapshot of your financial state – it may just be an approximation but it gives you an idea of how much work you need to put in to realize your money goals and attain financial freedom. Make it a habit to compute your net worth regularly so you can check your financial progress. Ideally, your net worth should go up as you age since your earning capacity also increases.
If you’re just starting out financially or have some catching up to do, here are some useful tips to get you on track.
Increase your assets.
Find ways to bump up your cash flow like asking for a raise at work, starting a profitable side-business, increasing your savings, or getting started with investments.
The longer you have debts, the more money you lose because the interest eats up a big chunk of your payments. So work on a plan to pay off your debts ASAP. Find a debt repayment method that works for you and stick to it until you get to zero balance. Cut back on your expenses if you need to and don’t get into any more debts.
Live below your means.
There’s a reason why this advice is constantly preached by financial experts. The only way to gain financial stability and freedom is to keep a simple and frugal lifestyle. Prioritize your “needs” first before entertaining any “wants”. Just because you can afford some luxuries doesn’t mean that you have to make it part of your life. Trust us; you can live comfortably without being too extravagant.