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What is your net worth?
A little-known concept is that of a person’s net worth. We talk about it a lot in English-speaking countries, because it is an important component of the “credit score” in the US for example, which is a system for rating people’s good financial management. we indirectly take into account a person’s net worth when they have to take out a bank loan.
What does net worth mean?
Your net worth (also called personal net worth) is an extremely useful tool for measuring your economic situation and your overall financial progress from one year to the next. Your equity is essentially a total of all of your assets minus your liabilities. In other words, your net worth is the amount you get when you add everything you own, from the value of your house to the money in your bank account, and then subtract the value of all your debts, which can include a mortgage, car or student loans, or even credit card balances.
Net worth = assets – liabilities
Your assets are the valuable goods you own that can be converted into cash.
Examples include investments, bank and brokerage accounts, retirement funds, real estate and personal property (vehicles, jewellery and collectables) – and, of course, the cash itself.
Your liabilities, on the other hand, represent your debts, such as loans, mortgages, credit card debts, outstanding bills or student loans.
The difference between the total value of your assets and your liabilities is your net worth.
One of the challenges in calculating your net worth is to assign precise values to all of your assets. It is important to make conservative estimates when valuing certain assets to avoid inflating your net worth (i.e. having an unrealistic view of your wealth).
How to use this note?
In everyday life, knowing this information will not change much. No one is going to ask you. But if you think about it a little, you will realize that it is possible to have a negative note; so having more credits than goods. Having an idea of your net worth can help you track your progress over the long term. We agree that we want to have the largest number possible.
Bankers will mainly ask you for your credits to calculate your debt ratio. You should know that the authorized debt ratio is around 33%.
What to do with a bad grade?
However, I draw your attention to the fact that it is normal to have a very negative value in certain situations. This will inevitably be the case for someone who has just bought a house or apartment. This will also be the case for a person who has a large real estate heritage in rental investment. He will have to borrow large sums of money several times to pay. Even if this person manages to rent their apartments without worries and reimburses their credits well, their net worth will be very low. Net worth is therefore not a good indicator of our financial performance in all situations.
Why Your Equity Is Important
When you see financial trends on your net worth statements, you are forced to face the realities of your financial situation.
Examining your asset readings over time can help you determine 1) where you are and 2) how to get to where you want to be.
This can encourage you when you’re headed in the right direction (reduce debt while increasing your assets) and wake you up if you’re not on the right track.
To be on the right track, you must have the following:
Knowing your net worth is important because it can help you identify areas where you are spending too much money. Just because you can afford to buy something doesn’t mean you have to buy it. To avoid unnecessary debt accumulation, determine if you have a need or desire before making a purchase. To reduce unnecessary spending and debt, your needs should account for the majority of spending. (Remember, you can wrongly justify a need. This pair of $ 500 shoes does meet a need for shoes, but a cheaper pair may be enough to keep you going in the right financial direction.)
Pay off your debts
Examining your assets and liabilities can help you develop a debt repayment plan. For example, you could only earn 1% interest on a savings book while you have to pay off credit card debt at 12% interest. You may find that using this money to pay off credit card debt makes sense in the long run. If in doubt, calculate the numbers to see if it makes financial sense to pay off a given debt, taking into account the impact of no longer having access to this cash (which you might need in the event of an emergency).
Save and invest
Your net worth numbers can motivate you to save and invest money. If your statement of net worth indicates that you are on the right track to reach your financial goals, it can encourage you to continue what you do. Conversely, if your net worth indicates room for improvement (for example, over time, your assets shrink and your liabilities keep growing), this can motivate to take a more aggressive approach to save and investing your silver.
Train yourself to work on these crucial variables
This training to improve your finances is designed to help you get through these steps by guiding you, among other things, through the following elements:
- The concept of conscious spending. Conscious spending is a key and profitable principle in personal finance, but it is a very little known concept. It’s up to you to change that.
- Good debts and bad debts. Determining whether a debt is good or bad more often involves a more in-depth analysis of specific circumstances.
- How to get out of your bad debts. Discover a realistic method to get out of it.
Calculate your assets
- Start by listing your biggest possessions. For most people, this could include the value of their home, another real estate, furniture or vehicles. In the case of a business owner, this list would also include the value of their business, which has its own more complex calculation. Make sure to use accurate market value estimates in current euros.
- Next, you will want to collect your latest statements for your more liquid assets. These assets include chequing and savings accounts, cash, investments such as brokerage accounts or retirement accounts.
- Finally, consider listing other personal items that might be useful. These can include valuable jewellery, coin collections, musical instruments, etc. You don’t need to detail everything, but you can try to list items that are worth $ 500 or more.
- Now take all the assets you listed in the first three steps and add them up. This number represents your total assets.
Calculate your liabilities
- Again, start with the main unpaid loans, such as your mortgage or car loan balance. List these loans and their most common balances.
- Next, list all of your debts, such as your credit card balance, consumer loans, student loans or any other debt you may have.
- Now add up the balances of all the liabilities you listed above. This number represents your total liabilities.
Calculate your net worth
- To calculate your net worth, simply subtract the total liabilities from the total assets. For this exercise, it does not matter the size or the size of the number. It doesn’t matter if the number is negative. Your equity is just a starting point against which you can compare yourself in the future.
- Repeat this process once a year and compare it to the number from the previous year. By comparing the two, you can then determine if you are making progress or falling further and further behind your goals.
The final result
Be careful with estimates, especially with real estate values. Inflating the value of your assets may seem interesting on paper, but may not give a clear picture of your net worth.
Whatever your financial situation, knowing your equity can help you assess your current financial health and plan for your financial future.
By knowing where you are financial, you will be more attentive to your financial activities, better prepared to make sound financial decisions, and more likely to achieve your short and long term financial goals.