How to calculate net worth (and why it is important)

Debt freedom is overestimated-Tiffany Aliche, founder Tiffany Aliche said Budgetist.

Her suggestion? Think bigger.

“Debt freedom is A sort of Goal, debt freedom is not This Goals,” said the financial educator.”This The goal should be wealth. “

Aliche points out that instead of just tracking how much you owe, it is better to know how much you have when making financial decisions. Combining these two numbers, you can get a bigger picture: your net worth.

“That’s why I like net worth-it forces you to look at both sides of the equation,” she said.

If the term “net worth” sounds daunting and banker, it doesn’t have to be. We asked Aliche to help us break down what net assets are and why it is important to help you achieve your financial goals.

What is net worth?

When it comes to numbers in personal finance, it’s easy to become too focused on one aspect.

For example, your credit score tells the lender how likely you are to pay your bills—but it doesn’t say how much you need to pay.

But your net worth includes what you owe and a more complete and up-to-date picture of what you have.

“It’s almost like measuring your financial temperature,” Aliche said.

Are you ready to check your finances? We will explain what you should include when calculating your net worth and how to use that number to help you.

How do you calculate your net worth?

This is the formula to calculate your net worth:

Assets-Liabilities = Net Worth

In short, your assets are what you own, and your liabilities are what you owe.

Let’s start by delving into liabilities, because you may have a better understanding of what they might be.

Liabilities include balances of:

  • Mortgage.
  • Home equity loans.
  • car loan.
  • Student Loans.
  • personal loan.
  • credit card.
  • Outstanding bills, including medical debts.
  • Income tax payment.
Expert tips

Technically speaking, rent may not be a liability because you have not yet “owed” the rent for the next month. However, if you have two months left on your monthly lease of $1,000, then you will be responsible for that $2,000. Include it.

Assets include the following:

  • Cash (checks, savings, money market accounts, CDs).
  • The current value of any investment, including your 401(k) and IRA accounts.
  • The market value of real estate, such as your home.
  • Owned car (This is how to calculate the net worth of a car).
  • The cash value of any insurance policy (usually Whole life insurance and universal life insurance policies).
  • Collectibles such as art, jewelry, and furniture—anything you can (and reasonably) sell. For example, your good condition Batman #1 comic book may be important, but your IKEA desk is unlikely.
  • Business benefits-This can include the value of the business you own, but it can also include intellectual property that can continue to make money, such as a book or a song you wrote.
Aliche points out that instead of just tracking how much you owe, it is better to know how much you have when making financial decisions.Photo courtesy of Tiffany Aliche

Yes, an item can be either a liability or an asset-if your house has a market value of $300,000 and your mortgage balance is $200,000, then your house will eventually increase your net worth by $100,000 .

Aliche spends two days to help you evaluate liabilities and assets for free Live more challenging, But essentially “this is the money in your pocket, the money in your pocket,” she said.

Why is net worth important?

Net worth is not just a static number on the ledger, because the value of assets and liabilities will change. It is best to check at least once a year to change direction if needed.

For example, if you only focus on debt, consider what is missing from the big picture. E.g:

Debt the first year 5 years
mortgage 200,000 USD 177,000 USD
Car loan 20,000 USD 11,000 USD
Total liabilities 220,000 USD 188,000 USD

You reduced your debt by $32,000. That’s great, right?

But maybe when you focus on repaying debts, you ignore the changes in the real estate market in the past five years. The value of cars usually depreciates by 60% in the first five years, so your assets have changed accordingly:

assets the first year 5 years
House value 200,000 USD 175,000 USD
Car price 20,000 USD 8,000 USD
Savings 10,000 USD 6,000 USD
Total assets 230,000 USD 189,000 USD

During this period, your assets have decreased by $41,000. As a result, your net worth drops from USD 10,000 (USD 230,000 to USD 220,000) in the first year to USD 1,000 (USD 189,000 to USD 188,000) in the fifth year.

This is just a snapshot of your net worth—you may still have investments or credit cards to consider—but you understand: debt is only part of the equation.

Knowing your net worth allows you to better track your struggles and successes over the long term, so you can make the necessary changes faster.

In the example above, if you realize that the value of your home has been declining every year during these five years, you may have reassessed your goal of paying off the home in the third year and reducing losses through the sale.

“If we want to do better financially, [net worth] It will give us a way to understand where we are and set goals for what we want to achieve,” Aliche said.

By understanding your net worth, you will also see that the other side of the equation—your assets—is more than you currently have in your pocket.

This brings us to how to increase your net worth.

How to increase your net worth?

Aliche says she knows from experience what it’s like to focus on what you can buy for your next salary, not how to increase your net worth in the long term.

When she was a preschool teacher just after graduating from college, she lived with her parents so that she could save money-but it always seemed to be a short-term goal, which would drain her bank account.

“I thought I was a good saver, but I was just a good delayed consumer,” she said. “I used to save, save, save, go on vacation. Save, save, save, buy a car.”

Aliche did not save just for short-term goals, but changed her mindset to consider long-term wealth, including launching her Budgetnista business.

If you seem to spend every dollar on paying bills and saving for short-term goals such as holidays, she recommends starting gradually.

Expert tips

If you have to spend all your money on high-interest credit card debt, it doesn’t matter how much you make.Use one Debt service strategy To reduce your credit card debt liability.

She said: “At a state, you can barely squeeze out $1, $2, $10, and $20 to invest in wealth.” “In the beginning, your $10 was not enough, but you put it aside. , When it can join other siblings.”

Once you start investing in long-term strategies, these investments can begin to passively make money for you. Funds can come from making interest-generating investments, buying value-added real estate, or starting a profitable business like Aliche.

“I no longer need to be TIffany as a kindergarten teacher, because my job is like that,” Aliche said. “The things you own-these are your assets-will work for you someday, so you don’t have to do that.”

Using your net worth as a measure of your assets and debts can help you understand how small changes (such as saving the money you usually spend on food delivery) can have a significant impact.

“You make a budget to save, you ultimately save for investment, and you invest to increase wealth.”

Tiffany Wendeln Connors is the full-time writer/editor of The Penny Her biology and other work is here, And find her on Twitter @TiffanyWendeln.

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