What is net worth and why is it important?
Net worth is a measure of wealth. Your personal net worth is the difference between your financial assets (what you own e.g., Cash, property, investments) and your financial liabilities (what you owe e.g., loans, debts, unpaid taxes). If your assets exceed your liabilities, you will have a positive net worth. On the other hand, if your liabilities exceed your assets, then you will have a negative net worth.
Knowing your net worth is important for many reasons:
It is the best way to know exactly what your starting point is in any financial plan you develop.
It can help to identify areas of overspending.
It encourages debt reduction by helping to develop a plan for paying off debts whether that be over a short or long period of time.
By seeing the results of your net worth, you can confront the realities of your financial situation as it stands now and plan for where you want it to be. Reviewing your net worth regularly can help track your progress and keep you heading in the right direction.
How do I measure my net worth?
A personal balance sheet can be used to work out net worth. This lists all of your assets and liabilities (including those which are jointly owned), and then the total debt is subtracted from your total assets to calculate your net worth. This will fluctuate over time as the values of assets and liabilities change, so it is important to regularly review and update your personal balance sheet.
Calculating your net worth can be a daunting process, especially if your net worth is low or negative. However, your current net worth is simply a number which can be changed over time. If it isn’t where you want it to be, then consider the process to be the motivation to push for the growth you desire.
We can help you realise your net worth, set targets and actions to grow your wealth. For more information, get in touch.