Understanding Your Net Worth

When you think about the most successful people in the world, what words come to mind? Rich, powerful, and wealthy are just a few. Most people don’t realize what goes into these people being so successful; it’s not easy, but all of the information is available. A key component that people should be aware of is NET WORTH. Simply understanding what it is, and how  you can  change it, is financial empowerment alone !

 

  1. You have to understand what net worth is!

Your net worth, by definition, is your assets, minus your liabilities. Assets can be considered anything that you own outright; a fully paid off home or car, savings accounts, physical cash, retirement accounts (like a 401k or an IRA) the equity on your home is also considered an asset.

Liabilities by definition are financial debt. If you have a house or car, and they aren’t fully paid off, the remaining balance is your liability. Unpaid bills such as student loans (we all know someone who has one of those!) and credit card debt can also be considered a liability. Subtract your liabilities from your assets, and that’s your net worth!

 

  1. Know your worth! Calculate your net worth!

The next step to understanding net worth is to know your own, Knowledge is power! Subtracting your liabilities from your assets is the way, but it may not be as simple as it sounds. Thankfully, there are plenty of tools available online to assist you. I prefer to use Mint (mint.com) it’s an awesome (and free!) financial management site as well as a great budgeting tool; however, if you sync it with your accounts you can also determine your net worth. Financial empowerment is all about knowing where you stand, and being realistic about it, which leads to my next point….

 

  1. If you want to change your net worth, be realistic about it!

Simple enough, right? There are many financial situations which can occur and typically no ones net worth is the same as the next persons. A person’s net worth can actually be 0, or in the negative, if you have more liabilities than assets. In addition, your net worth may not as high as you think, depending upon your age. You have to set realistic numbers when it comes to increasing your net worth, but you have to be able to account for emergencies. If you’re in the negative, setting the bar too high may not be the best idea starting out; keep it in perspective and know what’s manageable right away, and what may take some time.

  1. Set your short-term and long-term financial goals!

If you want to increase your net worth and be realistic about it, it’s very important that you set short and long-term financial goals! While short-term and long-term may be considered in a sense of time, in relation to finances and net worth, we’re talking about what can be taken care of on a smaller scale, versus a larger scale. Paying off a credit card or a car can be considered a short-term financial goal; something simple. Long term financial goals could be paying off a home, or saving money for retirement. Planning those and being realistic about it sets you up to increase your net worth much easier than if you just go about it blindly!

 

  1. Plan a budget!

Budgeting is another one of those things that should be rather straightforward and obvious, but there are still far too many people that actually don’t do it! I’ve taught people how to set and plan a budget, and there are several tools available online to help you (you should definitely go to mint.com). When it comes to actually setting a budget, the 50/30/20 rule is a good starting point. 50% of your net income goes towards Needs (such as necessities) 30% towards your wants and the other 20% to savings. You can play around with this as you see fit, but this is a good starting point towards increasing your net worth.

 

Understanding and managing your net worth is one of those things you must know in order to be successful financially. Keeping the above tips in mind, you’ll be on your way to increasing your net worth faster than you think.

 

XOXO

 

Angel Radcliffe

@MissRMBA

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