If you’re anything like I used to be images be, ignoring your financial numbers, you may not even have heard of net worth. Each month we were under our income amount in expenses so I thought that was good enough. I would bury my head in the sand when it came to money.
Even when we started our financial journey I didn’t think that net worth was that great of a number to calculate. The first time I calculated our net worth we were negative with our mortgage, car payments, and lack of savings.
This wasn’t very encouraging. Other than the fact that we knew we could only go up from there.
For the first year it seemed like the numbers never really moved. We were paying off our debt and starting to save.
It wasn’t until we had no debt and nothing to do with all our extra money that things changed quickly. For the last two years we’ve been saving into our retirement accounts which have almost $100,000 in them combined. We’ve got $50,000 saved in various savings accounts. The equity in our home has grown (and is now being increased by renters).
You may be wondering what was our secret?
Honestly nothing too remarkable. We set goals for ourselves to get debt free, start savings accounts to stabilize our spending and became intentional with our retirement savings. We set our savings up to be automatically deducted so we wouldn’t spend it.
What is net worth?
Net worth is what you own (your assets) minus what you owe (your debts). This includes your home, cars, savings, investments, cash, etc..
How to calculate your net worth.
Step 1: Add Up What You Own (Your Assets)
Your assets include the stuff you own that has monetary value attached to them. In this calculation it doesn’t matter if your asset is a house and in order to get the money you’d have to sell it. These are still your assets.
The first step to figuring out your net worth is to make a list of what you own. Here is a list some of the things that qualify as assets:
- Cash: savings and checking accounts
- Retirement accounts and other investments: 401(k), 403(b), 457s, and IRAs
- Investments: brokerage accounts
- Real estate: home equity and rental properties
- Vehicles: cars, trucks, RVs and boats
- Contents of your home: jewelry, art, collector’s items, etc.
So, let’s take a look at an example:
- Home valued at $270,000
- 401(k) with $30,000
- Cars worth $20,000
- Savings account balance of $50,000
- Checking account balance of $2,000
When you add up the value of these items, there is $372,000 in total assets.
Step 2: Add Up What You Owe (Your Liabilities)
Next, you add up all your liabilities. These are all the debts and outstanding payments you have yet to pay. Hopefully, all your debts equal zero. But if that’s not the case, it’s time to get them all added up.
Here are some of the most common forms of consumer debt:
- Credit cards
- Student loans
- Car loans
- Medical bills
Back to our example, this person is starting their financial journey:
- Credit card debt totaling $8,000
- Student loan debt of $30,000
- Mortgage balance of $250,000
- Car loan of $10,000
- Medical bills equaling $1,000
in this example all of the liabilities add up to $,000.
Step 3: Subtract Your Liabilities From Your Assets
You know the total value of your assets and how much debt you’ve got to pay off. Now all you have to do is subtract! Here’s the formula:
– Total Liabilities
Back to our example.
– $299,000 (Liabilities)
$73,000 (Net Worth)
Remember, your net worth shows you where you are financially.
Why we made so much progress.
The reason we made so much progress in such a short time is because we became intentional with our money. We became intentional with our savings. When we had nothing else to throw our money at we were able to make over ten savings accounts for various expenses including travel, hunting, Christmas, car maintenance,personal accounts, etc.
We automated our retirement savings. It comes out of our paychecks and goes straight into our 401k’s. We automatically draft our IRAs monthly and have opened up a bridge brokerage account.
Whenever we talk about our savings I never felt like we were doing much. But just last month I calculated how much we had saved end it was way more than I was expecting.
Even as a financial coach I was doing the right steps but not seeing and feeling the benefit of our hard work. Now I feel like we’ve finally made progress.
Why You Should Know Your Net Worth
Why is it so important to know what your net worth and how can you use it to accelerate you toward your financial goals.
Your Net Worth Is Your Baseline
What do you have saved for retirement? Are you saving enough for retirement? What debts do you need to pay off? Your net worth can help you answer these questions. It gives you a 30,000 foot picture of your current situation.
If you are anything like me you need to understand, when you calculate your net worth for the first time it will probably make you feel like crap. You may not like where you are financially, and that’s okay. If you’re think you should be further ahead, you can still turn things around. It’s never too late to start. Stay focused, keep your eye on the next goal in front of you, and find ways to make progress.
Your Net Worth Shows What You Need To Focus On
Your assets may be high or low. Your debt may be high or low. Ideally, you want your debts to equal zero. But that’s not always possible, this is because of mortgages.
The goal here is to increase your net worth, that can be in the form of increasing your assets or decreasing your debts.
Your Net Worth Shows What You Need Financially
In order to retire you need to reach a certain number. This number is unique for everybody. Depending on how you wanna live in retirement determines what your number is.
If you want an extravagant life style you will need more money saved than someone wanting to live modest lifestyle in retirement.
If you’re ahead in retirement savings, keep doing what you’re doing and build on the momentum you already have. If you’re behind, it’s time to get serious! No matter where you are, it’s never too late to build wealth and reach your financial dreams!