Hi everyone myself Arpit and today we're looking at one of the most fundamental principles of wealth - NET WORTH and how to calculate yours.
What is net worth?
Your net worth is a clear indicator of your financial health. It's the value of all assets minus the total of all liabilities. To put it simply, it's what you own minus what you owe. So the first step to learning what your net worth is is to come up with a list of all of your assets and one of all of your liabilities. Let's take a closer look at both of those.
Number 2- List of assets
Your assets are everything that adds value to your bank account. What you owe can come from the cash in your wallet to the furniture in your house. When you write this list down make sure to put in every single object that belongs to you. The list can include cash, savings, and retirement accounts, the value of your home, car, boat, etc. insurance policies, business interests, and all personal belongings. Yes, even the clothes you're wearing. Remember to consider the current market worth of your estate, as well as all of those belongings that you could sell and not the price you paid for them.
Number 3- The List of liabilities
Be even more specific and precise here than you were in your list of assets. Knowing exactly where your money goes is the first step to putting your finances in order. Here are some examples of what should appear in your list of liabilities, your credit card balances estimated tax owed home mortgage loan, student loan, outstanding bills, etc. The more detailed you are here, the easier it'll be to understand how you're spending your money.
Number 4 - Do the math
Add up all of your Assets and all of your Liabilities. Then subtract your liabilities from your assets. That's your net worth. Let's take a look at a couple of examples.
Examples
Example A-You're a new graduate with $1,000 in your savings account $10,000 in student loan debt and a part-time job that pays just enough to cover your monthly bills. You're looking for a full-time gig so you can get on your feet. Your student loan has an APR of 4.65% your assets are $1,000 cash savings, your liabilities are $10,000 in student loans, and your net worth is negative $9,000.
Example B- You're a homeowner, your home is worth $350,000 on the current market, you have $250,000 left to pay on your mortgage and you have a credit card balance of $10,000. Your mortgage has an APR of 3.25% and your credit card charges 19.99% You have $10,000 in cash savings and $30,000 in retirement investments your income is enough to pay all of your bills and you have $500 in discretionary cash left over each month. Your assets are $10,000 cash savings a home valued at $350,000. $30,000 in retirement investments, your liabilities $10,000 credit card balance, and $250,000 left on your mortgage. In this case, your net worth is $130,000.
Difference between Net income and Net worth
Do not confuse these two. Your net income is what you've earned through your job after taxes and payroll deductions, This is different from your net worth, which is the total value of everything you own minus all of your debts.
Liquid net worth
Liquid net worth is the portion of your net worth that could easily be converted to cash in a day if need be. Stocks and bonds can be considered liquid assets. This is because you could dispose of the stock or bond in your brokerage account and get paid within three days. jewelry or property on the other hand is not considered to be liquid assets as they're harder to convert immediately. accessible money. In an emergency or a situation where cash is needed quickly, liquid assets will be precious. But keep in mind because the liquid net worth only considers your liquid assets, it will be lower than your total net worth, which includes all of your assets.
Why knowing your net worth is important?
As we said before, your net worth is the picture of how healthy your finances are. Let's take an example - It's easy for a newly graduated person to have a negative net worth you just finished school and it's most likely you don't have a decent job yet. But still, knowing where you are today and where you need to put money can help you create a budget to pay off your debt. And if possible, start saving money. And calculating your net worth is definitely a useful exercise. Even if you're well into your career. Perhaps you need to find out if you're saving enough money for retirement or help you decide what to invest in and how much you have available to invest. Not knowing your net worth is like trying to get healthier without knowing how much junk food you're ingesting. Assess your current situation first, and then decide how to move based on that.
How to increase your net worth?
Many have calculated their net worth and come to the conclusion it's in need of a revamp yet improving can seem very difficult. However, it only requires some willpower and a bit of patience. Start by paying off your debts as soon as possible. Make extra payments where possible and work to reduce your overall debt burden. Keep the money you've saved where it will grow. your checking account should be lean enough for your regular spending and everything else should be in an interest-bearing account. Even better invest what you can. If you're new to the investment world, we highly recommend JC Bogles The Little Book of Common Sense investing.
There's one last suggestion to increase your net worth that billionaires swear by, find multiple sources of income. Getting additional income from several sources can go a long way in helping you increase your net worth. It will not only help you to pay off your debt sooner but also take away your need to borrow often. You can get additional income from a second job doing some freelance work selling items online or starting a part-time business. There are many endless opportunities out there. All you need to do is find the one that works for you. Thanks for spending some time with us today.
