Imagine you have a goal to lose weight. But you don’t know how much you currently weigh and you don’t know how much weight you want to lose. In the realm of weight loss, this is a ridiculous way of going about meeting your goal. In fact, you would probably give up on this goal rather easily.
The same things hold true in meeting your personal finance goals. You will be unsuccessful in obtaining your goals if you are wondering around cluelessly. Instead, you must know where you are so you may plan for how far you need to go. This is where knowing your Net Worth comes into play.
Knowing your Net worth is the same as knowing how much you currently weigh if you have the weight loss goal. Additionally, tracking the growth of your Net Worth is similar to that of tracking the number of pounds you have lost. It gives you a tangible value to measure the success of your goal and motivates you to continue.
Net Worth gives you a measure of how “valuable” you are. Sure you could obtain a loan for a million dollar house. But this wouldn’t mean you are a millionaire. Your Net Worth would not be any higher than if you didn’t buy the house.
Instead, your personal value is what you have left after everything is paid off. If you were to pay off all your debts and you had a million dollars left over, then you would be a millionaire.
The calculation of Net Worth is rather easy. You add together all of your assets, then subtract all of your debts, and the outcome is your Net Worth.
Assets are your money and anything you can sell for money. To calculate your assets, add in your bank accounts, checking accounts, investment accounts, TSP accounts, and any other account you have.
You will also include items like your car, house, and any other big ticket item you may have which could be sold. Unlike your bank account, knowing the value of your car is something you will need to estimate.
Remember, if you recently bought a new car, it is not worth what you paid for it. Rather, report what you might be able to sell it for.
Debts are the money you owe to other people. This could be in the form of loans, such as student loans, car loans, mortgages, or any other type of loan.
They could also come in the form of revolving debt such as credit cards and lines of credits. And let’s not forget the money we owe to our family and friends.
Net Worth Calculated
Below is an example of how you might calculate your own Net Worth. In this example, the individual has a total of $272,000 worth of assets and $248,500 worth of debt. Therefore, this individual has a Net Worth of $23,500.
What would it mean if the value was negative? Well, that means the individual has more debt than things to show for the debt. That would definitely not be the ideal situation for anyone to be in.
Increase your Net Worth
If you are upside down in your Net Worth, or not at the desired value what is there for you to do? The simple answer is to increase your assets and reduce your debts.
Think about ways in your life that you can cut your expenses and increase your income. It may seem like small amounts of money at first, but it will add up. Contribute these extra funds to paying down your debt faster or >inveting for your future.
In the end, becoming a millionaire is not about having a million dollars worth of assets, but rather having a million dollars of Net Worth.
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In the example above, I completed the Net Worth Calculation using Microsoft Excel. It could be time-consuming to look up the value of each of your accounts each time you want to know your Net Worth.
Intuit, the same company that does QuickBooks and Turbo Tax, has come out with Mint. Mint allows for you to sync your accounts with them and they pull the data every time you log in. The site even allows for you to enter the value of your car and will grab a home estimate from Zillow.
People have expressed their concern with having your data accessible by one company. I can appreciate this concern, but I also recognize so many people and business trust Intuit for their bookkeeping and tax.