People like to flash their net worth, using it to show that they belong to the millionaire’s class, when they barely have few hundred dollars in their bank account. Are they to be believed? What is net worth anyway and is it a reliable measure of someone’s financial status and standing?
What is Net Worth?
Simply put, net worth is the total value of what you own (assets) minus what you owe (liabilities). Expanded further, assets are things like cash, investments and properties that you own. Liabilities on the other hand are debt and other thing you owe and need to pay back such as loans, mortgages etc.
If your assets are greater than your liabilities, you have a positive net worth. If your liabilities are greater, your net worth is negative. Some people don’t think including your house in your net worth is fair, but the official definition does include your residence. With this being the case, let us go over 5 reasons why knowing your net worth (negative or positive) is a good thing:
Clear Financial Picture – Net worth shows your overall financial health by balancing what you own (assets) against what you owe (liabilities). It gives you a snapshot of where you truly stand. There are a lot of online tools and apps out there that can simplify the process and update it for you as you go, with little input on your part after the initial setup. One click and you have a direct look at where you stand, which can be very powerful.
Progress Tracking – Regularly checking your net worth helps you measure growth over time. You can see if your saving, investing, and debt reduction strategies are moving you forward. For example, you can create milestones and track against them, such as checking your net worth on the first day of the year, then again 6 or 12 months later and see where you stand.
Motivation & Accountability – Watching your net worth increase (even slowly) can motivate you to keep making smart financial decisions. On the other hand, if it drops, it alerts you to adjust your habits. For example, in my case, a big chunk of my net worth is tied to my investments and as the stock market has been on the rise of late, my net worth is on lockstep as well.
Better Decision-Making – Knowing your net worth helps you make informed choices—like whether you can afford a major purchase, take on debt, or need to prioritize paying off liabilities first. In fact, it even helps you make smaller decisions, whether you should cut certain subscription services, if you should look for a more fuel efficient car etc. Though it is important to note that there is a difference between your budget and net worth and what may be valid for one may not apply for another and vise versa.
Financial Independence Planning – Tracking net worth helps you set realistic goals for retirement, passive income, or financial freedom, since you know how far you are from the level of assets needed to sustain your lifestyle. For example, if you are in your early 60s, with assets of over 1.5 million and zero liabilities, then that gives you a peace mind knowing that you are ready fore a good retirement with not much financial stress.
When used accurately and responsibly, combined with the usage of financial budget, net worth could be a powerful financial tool to know where you stand and how far you have come. Take the time to figure our your net worth and make it a habit to check periodically to see how things are changing (hopefully for the better)