What Is Your Net Worth? Knowing the Answer Could Help You Financially
A person’s net worth is not some arcane financial term. It is a living, breathing testament to your financial situation, and it says volumes about your assets and your debt, in addition to how you should be budgeting and planning for the future.
In the simplest terms, your net worth is a calculation of what you own minus what you owe at any point in time. The plus side of the equation requires the input of accurate figures regarding your income; current savings, brokerage, or retirement amounts; and the value of any home, real estate, or business ownership. On the negative side, we subtract monthly expenses, mortgages, student debt, credit card debt, taxes, and any legal obligations (e.g., alimony, child support). It cannot account for unforeseen future needs, like medical issues, family situations, or business decisions, but it provides a snapshot of your financial health today.
Understanding your net worth is extremely valuable for a very fundamental reason: It forces you to grasp the details of your month-to-month budget, and how individual line items may change over time. That is key to understanding where you can reduce debt and/or increase savings, to promote a better financial position.
Finally, it can identify whether you have sufficient liquid assets for a rainy-day or emergency fund, which we discussed in the previous post.
Tracking your net worth over time is an excellent way of gauging progress towards your financial goals. This point I cannot emphasize enough: Your efforts to save money, pay off debts, and create a secure financial future lead to increasing net worth over the years. Periodically measuring your net worth validates all these efforts. It provides peace of mind regarding your financial situation today and for the future you are working hard to build. Having these assets, tracked by calculating your net worth, may allow you to not only live with dignity in your later years but potentially outlive their money.
Finally, calculating your net worth is an absolute necessity for estate planning. Assuming you do outlive your money, how will your assets be distributed after you pass away? Does your plan today for a financial legacy for your heirs align with the likely future outcome?
If you are 35 years of age or older and haven’t calculated your net worth, we advise that you do so. If you haven’t yet done this valuable exercise, we at Isakov Planning Group can help. Contact us today for a more secure financial future!