What is your net worth?
Firstly, you need to appreciate what your ‘net worth’ actually is. It’s the sort of thing that is popular in America, where people seem much more open to talking about their money. Many US sites have calculators to help you work this out if you feel you need a hand with the sums.
As The Simple Dollar notes, your net worth is the value of your assets, minus any liabilities you have. Your assets include any properties you own, cars, cash you hold in savings and your investments. Your liabilities are the debts you have such as your mortgage, credit cards and loans.
You shouldn’t panic if the figure you end up with is negative. This is fairly common if you’re young as you’re likely to owe a fair amount of money on your property and might not have earned enough money to build up your savings, for example.
Still, there are many reasons why it might help to do this calculation for your finances.
It can be a warning sign: Some people need the shock of seeing their debt written out in black and white in order to realise the severity of their personal financial situation. It can prompt you to take advice and look into the ways in which you can get help with your debts. From debt management plans to debt relief orders and individual voluntary arrangements – there all sorts of measures you could take and it pays to research them and find out which is best for your situation.
It makes you appreciate your assets: At the other end of the spectrum, writing out all of your assets can make you appreciate the importance of them. Whether it’s realising how much equity you’ve built up in a house – which increases your net worth greatly – or making you take stock of the savings and investments you have, this process can be illuminating.
You can work towards a target: Don’t like the look of your net worth figure? Whether it’s boosting your savings, moving up the property ladder or clearing your debts, you can use this stat to spur you on. This figure gives you a ‘bigger picture’ by letting you look at your finances and see the wider impact of completing smaller financial goals you might be working towards. Review your calculation in one, five or ten years’ time so that you can see how this has changed.
It allows you to plan properly: Having a target is important and so is having a plan for how you’ll achieve it. If you have a positive net worth with multiple assets you can have the confidence to make further investments or spending choices. If you have a negative net worth, you can focus your plan on removing debts and building up assets in the short to medium term. This business-like approach to your personal finances might suit your personality – especially if you are used to running the finances of a business in your professional life.
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