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You likely know exactly how much money you make, or how much you owe on your rent or mortgage each month. But if there is one financial number you really should know, it’s net worth. Ben Appel, financial well-being project manager at SunTrust Bank, breaks down net worth, discusses what sets it apart from income and explains why it’s the only number that reveals your entire (and accurate) financial situation.
What is net worth, and how does it portray an accurate picture of someone’s finances?
Net worth is all your assets minus all of your liabilities. It’s as simple as that. So think about everything that you own—whether it’s the cash you’ve got in your back pocket, the amount of money in your checking and savings accounts, how much you have in your 401(k) and other investments, as well as the value of your home and your car.
Now think of the corresponding debt you have, like student loans, credit card balances or a mortgage. Subtract those liabilities from your assets and you have your net worth. You know it’s accurate because it tells both sides of the equation. For example, if you just bought a new house worth $200,000 in today’s market, then you probably have a mortgage for about the same amount. This can actually cancel out the home’s value, as you have a $200,000 loan for a house worth $200,000.
It’s important to remember that having a high income does not necessarily correlate to having a high net worth. In fact, there are Americans reaching financial confidence every single day who don’t have high incomes, yet they have a high net worth.
Why is net worth a crucial calculation in finance?
Net worth tells us exactly where you are, and therefore, where you are headed. It’s almost like your financial report card. It can also be a big wake-up call, as you might have forgotten about some of the debts you have or overestimated the value of some of your assets.
Net worth tells us the truth. It’s a number you can’t hide behind. You might have a nice house, a nice car and nice clothes that might make others think you are really wealthy. But that’s not the full picture because it doesn’t take into account the debts you owe.
Challenge: Calculate your net worth at regular intervals that make sense to you and your financial advisor to make sure you’re on the right track.
What steps can someone take to improve their net worth?
There are only two ways: increase your assets or decrease your liabilities. So not only do you have to save or earn more money, but you also have to pay down debt.
While net worth is the most accurate representation of your financial standing, at no point should you look at your net worth and think, “There is no hope. I’m too far behind and never going to catch up.” There is always time. Knowing your net worth is kind of like getting a little note in the mail that says: “You are here. And this is where you are headed.” And now you can start going in the right direction.
Challenge: Saving more money doesn’t have to mean making more money. Consider investing some of your money or taking advantage of a savings account that accrues interest.
Once someone knows their net worth, how do they approach their short- or long-term goals differently?
It’s hard for me to imagine a person setting goals without knowing their net worth. Knowing your net worth gives you confidence in the direction you are headed.
Goals are directions you want your life to go. So knowing where you stand helps to adjust your path accordingly, realizing what works and what doesn’t. You might find yourself being able to achieve certain goals more quickly as your momentum builds in that direction.
How does knowing your net worth bring you closer to achieving financial confidence?
I think just the simple truth of knowing your net worth is extremely powerful because it gives you the foundation, direction and motivation to get started. It’s a jumping-off point, and while it’s true that getting started is the hardest part, once you do, you are on the path toward financial confidence. And that is a powerful thing.
- Net worth is the value of all your assets minus all of your liabilities.
- To help your net worth, make (or save) more money or pay off more debt.
- High income does not equal high net worth.