Net worth is a term that is often thrown around in discussions about personal finance and wealth management. But what exactly is net worth and why is it important to know your net worth? We’ll explore the answers to these questions and offer practical tips on how to calculate and improve your net worth.
What is net worth?
Net worth is the value of your assets minus your liabilities. In other words, it’s the amount of money you would have left over if you sold everything you own and paid off all of your debts. Your assets include things like cash, investments, property, and valuable possessions such as jewellery or artwork. Your liabilities include any debts you owe such as mortgages, car loans, credit card debt and student loans.
Why is it important to know your net worth?
Knowing your net worth can be a valuable tool in managing your personal finances. Here are some reasons why:
- It helps you track your financial progress
By calculating your net worth on a regular basis, you can track how your financial situation is changing over time. Ideally you want to see your net worth increase as you pay off debts and build up savings and investments.
- It gives you a clear picture of your financial health
Your net worth provides a snapshot of your overall financial health. If your net worth is positive (i.e. your assets exceed your liabilities) then you’re in good shape. If it’s negative, that means you have more debt than assets and need to work on improving your financial situation.
- It helps you make better financial decisions
Knowing your net worth can help you make informed decisions about things like buying a home, investing in stocks or taking on new debt. You can use your net worth as a benchmark to see if a particular financial decision will help or hurt your overall financial health.
How can you calculate your net worth?
- Make a list of all your assets. This includes: cash, investments, property, motor vehicles and valuable possessions. (Assets that can be converted to cash).
- Assign a value to each asset. For cash and investments, this is easy – just add up the balances in your bank accounts and investment portfolios. For property and possessions you may need to do some research to find out their current market value.
- Make a list of all your liabilities. This includes things like mortgages, car loans, credit card debt, and student loans.
- Add up the total value of your assets and subtract the total value of your liabilities. The resulting number is your net worth.
What can you do to improve your net worth?
If your net worth is negative or lower than you’d like, there are several steps you can take to improve it:
- Pay off debt: start by paying off high-interest debt, such as credit card balances, as quickly as possible. This will reduce your liabilities and improve your net worth.
- Build up savings: set aside money each month into a savings account or investment portfolio. This will increase your assets and therefore improve your net worth over time. The Austen Morris group of companies assists individuals from around the globe to build their savings through regular savings plans. We do this in all major currencies, from the world’s leading institutions.
- Invest wisely: If you have extra money to invest, choose investments that have a good chance of earning a return based on your life stage and appetite for risk. This will help grow your assets and improve your net worth.
Net worth is a critical metric for managing your personal finances. Knowing your net worth can help you track your financial progress, make better financial decisions and improve your overall financial health. So take the time to calculate your net worth today and start taking steps to improve it.