“When you understand that your self-worth is not determined by your net-worth, then you’ll have financial freedom.”
– Suze Orman
So much yes to this!
We love this quote because it serves as a wonderful, much needed reminder that there’s more to life than money. You know this, of course, but that said, money still provides the means necessary in order to afford the life you’re hoping to live. So while Suze is 100% right that your self-worth should NOT be determined on the basis of how wealthy, popular, or successful you are, your net-worth (on the other hand) is a worthwhile statistic you can and should improve.
Let’s start with the basics. What is your net-worth? How is it calculated?
Simply put, your net-worth provides a picture of your financial health. It is your total financial value after assessing the value of everything you OWN: your assets (i.e. investments, residence, real estate, etc.), subtracted by everything you OWE: your liabilities (i.e. consumer debt, outstanding mortgage, student loans, etc.). Every financial decision should be made with the end goal of increasing your net-worth.
So …how can you calculate your net-worth?
Start by listing all of your assets and their known values. Note* to determine the current value of your home or automobile, it can be helpful to consult Zillow or Kelley Blue Book to determine the fair market value.
Here’s a hypothetical example:
Jordan and her husband, John, have $325,000 in assets between the two of them, as documented below:
Checking/Savings Account balance: $35,000
401(k) plans: $45,000
IRAs: $10,000
Value of Primary Residence: $235,000
Total Assets: $325,000
Their Liabilities are documented below:
Mortgage remaining: $205,000
Student Loans: $15,000
Credit Card debt: $3,500
Total Liabilities: $223,500
Jordan and John’s Net-Worth: $101,500
Still a little puzzled about this concept of net-worth? You’re not alone! Here are some FAQs:
What if I calculate my net-worth and it’s negative?
If you find yourself with a negative net-worth, don’t panic! This doesn’t necessarily mean that your financial health is in a terrible spot, but it does indicate that your liabilities outweigh your assets. If you still have student loans and other large amounts of consumer debt, this makes sense. You likely haven’t been able to afford accumulating enough assets or eliminate enough debt to erase those financial liabilities from your personal balance sheet yet. So…you might then be wondering…
How can I improve my net-worth?
Building your net-worth is the name of the game. Every decision you make should be made with the intention of aiming to reduce your liabilities, responsibly accumulate assets, and ultimately, increase your net-worth. The healthiest way to improve your net-worth is to eliminate unnecessary expenses, and aim to reduce your debt. For most people, credit card debt is the one of the larger liabilities they must deal with. By making a conscious effort to control your spending and set up a strategic savings plan, you may find you’re able to make significant progress in eliminating those stressful liabilities. Conversely, you can also increase your net-worth by purchasing worthwhile assets or responsibly investing in your future. While you may expend resources (namely cash) to purchase that first house or make contributions towards your retirement plans, your net-worth will increase if those assets appreciate in value. Ultimately, improving your net-worth is a balancing act of responsibly investing and aggressively eliminating unnecessary liabilities.
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