Know Your Worth
Maybe the best motivation to get your finances in order is when you really take a look at your finances. Knowing how much you make and how much you spend is only a piece of that puzzle. Considering all of your assets and liabilities, are you looking at a positive or a negative difference?
- If the difference is negative, than that is motivation to pay down debts.
- If the difference is 0, that’s good because you have no debt, but motivation to build assets up.
- If the difference is positive, you’re definitely headed in the right direction. Keep it up!
What is net worth?
Most simply speaking, net worth is the difference between your assets and liabilities. If all your loans and debts were paid, how much money remains? Consider that your net worth.
Examples:
- Betty has a total of $10,000 in savings, $40,000 in retirement, $30,000 in student loans, and a $10,000 car loan. Betty’s net worth is $10,000 ($50,000 - $40,000).
- Jackie has a total of $50,000 in savings, $100,000 in retirement, $20,000 in student loans, and a $20,000 car loan. Jackie’s net worth is $110,000 ($150,000 - $40,000).
- John has a total of $30,000 in savings, $50,000 in retirement and no liabilities. John’s net worth is $80,000.
- Carlos has a total of $100,000 in savings, $200,000 in retirement, $50,000 in student loans, a $30,000 car loan, and $220,000 remaining on a mortgage. Carlos’ net worth is $0 ($300,000 - $300,000).
- Michelle has a total of $5,000 in savings, $20,000 in student loans and $5,000 remaining on a car loan. Michelle’s net worth is -$20,000 ($5,000 - $25,000).
As you can see in the examples, one can have a modest amount in assets and liabilities and still have a positive net worth. At the same time, someone can have a large number of assets and still a small net worth if liabilities are greater than or equal to the total assets.
Do you know your net worth?
The purpose of this post is to encourage you to take note of where you stand. Are you on the right track? Should you be saving more and spending less? Could you be paying more to pay down debts? Only you know the answer.
Exercise
In a spreadsheet list all of your assets and calculate the total, then do the same with your liabilities. Find the difference. Now do this every month and monitor your progress. Are your debts going down and assets going up? The goal is to always be moving in a positive direction. Things come up and sometimes that net worth calculation will drop, but ultimately, you want that number to increase.
Assets - Liabilities = Net Worth
