Wednesday, November 15, 2017
Why Net Worth is So Important
In the world of personal finance, the term “Net Worth” gets thrown around a lot. Positive Net Worth, grow your Net Worth, focus on your Net Worth are all things we have heard. Often these same pundits fail to show the actual importance of Net Worth as it relates to wealth. In it’s simplest form, net worth equals assets minus liabilities. Your assets are the things you own, more importantly, the things you own that have value. This can include your home, investments, insurance products with cash value, real estate and of course straight cash. Your liabilities are your debts. These include any mortgages, student loans, lines of credit, credit card debts, and personal loans. You take all the assets you have and minus the liabilities and you have your Net Worth. Your main goal should be to grow this number every year. For some people, this is a negative number and that means that they need to get out of debt. For people nearing retirement, this number will hopefully be large enough to live comfortably on. In this post, I will explain why Net Worth is so Important to building wealth. This might be the most important factor in all our financial lives.
1) Accuracy
Calculating your net worth is the most accurate way to measure someone’s wealth. The reason it is so accurate is that it considers the whole financial picture. While some people may brag about how much they make or how much they have in their retirement savings account, they might fail to mention the personal loans they have tallying a few hundred thousand. Net Worth encompasses all of this and is vital to seeing the complete financial picture.
2) Measuring
Net Worth is a number, which makes it easy to understand. Due to this simplicity, it is easy to track your progress month to month and year to year. If your Net Worth is growing every year, then you are on track. If your Net Worth went down this year, then you have some work to do. Calculating net worth is easy and should be done regularly to see how successful you are with your savings plans.
The Top Financial Goals: From Your 20’s to Your 60’s – Budget Boss
3) Assets aren’t everything
Asking people what their assets are, often confuses them. Some people will name off their car, clothes, cell phone and even their TV. Assets are only of value if they can be resold for cash. If you don’t know what the resale value is or if it would be too small to care about then it is not an asset. In fact, it might be a liability because you still owe part of the payment. Needless to say, net worth is important because it allows you to see exactly what in your life holds tangible value and what is, in fact, a liability.
4) Debt makes more sense to you
Along the line of the above point, net worth statements allow you to make more sense of debt and what it is doing to your financial picture. Debt is a net worth crusher and hurts your overall financial picture greatly. At the same time, certain debts aren’t as bad. For instance, Mortgage debt is not as bad because your home has resale value. It is the equity you have built in your home that is an asset, not the home itself. Other debts like lines of credit and credit cards hold no value and must be eliminated. Knowing your net worth allows you to see this.
5) Banks care, so should you
You can use your net worth to grow your net worth. A prime example is again of the mortgage. If you have a positive and large net worth, you can then borrow to grow that net worth. Things like rental properties, RRSP loans, and small business loans are only available to those with good credit and good net worth. Your lenders will check your net worth when you apply for these loans, so it is in your best interest to make sure your number is positive. You gotta spend money to make money, right?
What Do Mortgage Lenders Look For? – The Truth About Mortgage
6) Income isn’t everything
Far too many people think that because they make a lot of money that they are in great shape. Making a lot of money is only the first step to becoming wealthy. Yes, you have a better opportunity than those in lower income brackets, but you must utilize that high income to grow your net worth. If you make 150K a year but spend 160K a year, you are broke. The responsibility of having a high income is that you are saving a good portion of it. Remember, Net Worth equals assets minus liabilities and nowhere in that equation is income mentioned. Some of the richest people I know never made more than 50K a year.
Net Worth Calculator – Get Smarter About Money
7) It’s the ultimate motivator
Going to the gym sucks, well I think so anyway. Why does it suck? It sucks because you go to the gym once and you won’t lose a pound or become ripped. It is the repetition of going all the time that gets you in good shape. Once that happens you see the results and you are more apt to go. Growing your net worth is no different. Watching your investments grow while your mortgage balance declines is a thing of beauty. Knocking off debt after debt is one of the greatest highs ever. Hitting new thresholds in your RRSP or TFSA or Emergency Fund is amazing. Doing this will motivate you to keep going. Therefore, when I plan people’s retirement, I focus on Net Worth. What number do you want to have by the time you retire? What number do you need to live off at that time? What number can we add year after year to get there? What number will you save every month to add to that picture? Boom, supreme motivation at it’s finest. Net Worth is like stepping on the scale. It’s a slap in the face or a kiss on the cheek.
Use Your Net Worth as a Psychological Carrot to Motivate Savings – Life Hacker
When I take on new debts I always think about net worth. When my investments grow a little, I think about it as well. It is the supreme tool in considering my financial picture. It is my goal to grow that number year after year. Focusing on Net Worth will give you a tangible number that you can look to in all decision making. It is the best way to be on top of your financial outlook.
“When your self-worth goes up, your net worth goes up with it.” – Mark Victor Hansen
Email – joe@budgetboss.ca
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