As 2021 starts to gear up, now is a great time to take stock of your financial health. Has the coronavirus pandemic set you back? Are you on track with your saving goals? Are there any smart money moves you can make right now?
All important questions to answer as we embrace our new normal. So, where is a good place to start? Calculating your personal net worth. Here, we go over how and why you should do so a few times a year.
What Is Net Worth?
Your net worth is your assets minus your liabilities. Look at it like this: if you were to sell everything you owned and pull all of your money out of bank accounts, then pay off all your debts, how much would you have leftover? That's your net worth. That number could be positive or negative, but you're aiming for a healthy positive number.
Your assets are the things you own or are on your way to owning. Examples include:
- Savings and checking accounts
- Your home's value
- Retirement funds
It's also wise to include personal items that may have considerable cash value, like jewelry. You can include an itemized list of items that have a value over a number you set, like, say, $500.
Calculating your net worth for the first time will be more time-consuming than subsequent calculations, since you'll need to gather all of your information. Once you have everything together, you can put those documents in a safe place and come back in a few months to add any new items of value you have acquired. That'll make it easy to add up your assets in the future.
When calculating your personal net worth, a liability is a debt. This may bring up some questions about things like homes or vehicles.
Yes, an item can be both an asset and a liability!
For example, say your home is worth $500,000, but you still owe $150,000. The $500,000 would go in your assets category, while $150,000 would go in liabilities.
So next up on your net worth calculation to-do list is to write down every debt you have. Include things like:
- Credit cards
- Car loans
- Medical bills
- Student loans
- Your mortgage
Or any other major expense you're making payments on. If you update this document throughout the year, you'll be able to quickly gauge your net worth at any time.
Add up all of the figures in the asset category. Then, do the same for liabilities. Now, it's simple arithmetic.
Total assets - total liabilities = net worth
Don't compare your net worth to others, as no one else is in your exact situation. Instead, compare your net worth to yourself over time. If you start with a negative or low positive number, track it over time to see how you've improved.
Increase Net Worth
If your net worth is lower than you expected, the good news is that it can easily change. Since net worth is assets minus liabilities, you have to increase your assets while lowering your liabilities, or simply lower your liabilities.
Take a look at your two categories. Are there any manageable debts you can pay off soon? If you have a budget, now is a great time to see where you can cut back. The money you save can then be applied to more of your debt, which will increase your net worth.
There are also ways you can cut big expenses. For instance, when was the last time you looked at your refinance options? Even a 1% drop in interest can save thousands of dollars over the life of your loan, which means funds that can be used to pay down debts. There's good news for homeowners interested in refinancing, as rates are at historic lows. Trends indicate they'll start to rise the second the economy begins to bounce back, which means time is of the essence.
If you're ready to learn more about the rates and terms you qualify for, connect with a lender before rates rise!
Why Is Net Worth Important?
Why does net worth even matter? What's the point of tracking it over time? For starters, it's a way to gauge your financial health. Are you adding to your net worth as years go on? If not, you can re-evaluate some financial decisions so that you can be better prepared for the future and retirement.
Net worth can also make a difference when it comes time to take on a major loan, like a first or second mortgage. There are many factors a lender will consider, and a healthy net worth could lead to more favorable terms.
Knowing your net worth can also help you make informed purchase decisions. If there's a large item you want to finance, you'll be able to see if you can easily take on another expense. Living within your means is vital to a healthy financial future.
Ready to Calculate?
Here's a quick tip to keep in mind when calculating your net worth:
Be conservative with any estimates you make.
It's always better to find out that you have more money than you thought you did, rather than less! If you're not happy with your net worth, there are many small steps you can take to get on the road to better financial health, like refinancing your mortgage and cutting out unnecessary spending to help pay more towards your debt.
Compare your net worth year over year, or for even more detailed tracking, every three or four months. That will help you see if the little things you do every day are adding up in the ways you want them to.
Don't get discouraged if your net worth isn't where you want it to be. It takes time to build a solid net worth foundation, but the time you put in will be well worth the reward!