Whilst gross domestic product, unemployment numbers and inflation are key indicators of the state of a nation’s economy, your net worth is the key indicator of your overall personal financial health. So, do you know what your net worth is?
The simple definition of your net worth is your assets minus your liabilities. the best way to do this is to add up all the assets and property you own and take away any debt that you have. Now you have your net worth. There is no better way to accurately measure your wealth and measuring it over time can give you an indication of whether things are getting better or worse.
Track your progress
If you had a good understanding of your net worth today, you could set objectives for how you wanted it to grow over time. However, focussing solely on earnings and assets and how they may have grown over time is a flawed but common method of measuring financial progress. If your liabilities were to grow at the same pace as your assets however, your net worth would be static.
The first thing to do when calculating your net worth would be to add up all your assets. This would include the value of any properties you may have, personal possessions, pensions, savings and investments, businesses, shares, vehicles and anything else of value. The next step would be to make a list of all your debts. This would include mortgages, student loans, personal and car loans, taxes owed, credit cards and maintenance payments. Subtract your debts from your assets and you have your net worth.
Why it’s important
Your net worth shows where you are financially. Having a great salary, lots of assets, and an expensive home may sound appealing. Your net worth however is what you would have left if you were to sell everything and pay off all your debts. What would be left? Does that amount get larger every year? And how does it look when you throw inflation into the mix?
How to increase your net worth
One way to help your net worth grow is to make smart purchases into assets that are likely to grow in value and out-pace inflation. Although these all come with risk warnings, investing in stocks and shares, equities, commodities, and property are good ways of increasing our net worth whilst hedging against inflation. Purchasing or investing in deprecating assets or assets that don’t keep pace with inflation, such as clothes and shoes, vehicles and poor-return deposit accounts are sure fire ways of decreasing your net worth.
A lot us measure financial progress by the value of our home. But a home needs maintenance and maintenance means money. Factor inflation and mortgage interest into this and the value of your home may not be growing quite as quickly as imagined. Homes aren’t bullet proof either as the credit crunch and subsequent slide in property values indicated. This same principle applies to all the assets you may have.
Measure your progress
Measuring progress of your net worth goal lets you see whether you’ve made a dent, are at a standstill or have fallen behind. This information is useful in helping you understand where you are versus where you need to be. Working with a financial adviser may be the best option if you’re serious about making progress. Ask them to help you increase your net worth and share the responsibility with them.