If you were asked how much you are worth – would you know how to answer that question? Is there more to the answer than calculating your net worth? Net worth is a way to accurately measure your financial situation at a specific moment in time, and gives you a starting point to figure out what you need to do next in terms of your financial decision-making. But your financial worth does not end with the calculation of your net worth.
Net Worth Calculation
Calculating your net worth involves subtracting your liabilities from the value of your assets. If you have more liabilities than you have assets, you have a negative net worth. Negative net worth is common in younger people – particularly those who have student loans and credit card debt. Older generations tend to have higher net worth, as they have focused on saving and investing over many years.
There are many online net worth calculators and worksheets that will help you figure out where you stand financially. Plug in the numbers for each of your asset categories and each of your debts and liabilities on an annual basis, and you will see at a glance whether your financial situation is improving or going backwards from year to year.
Increasing Your Financial Worth
Regardless of where you stand on the actual net worth calculation, you can take steps to increase your financial worth. There is more to an individual’s worth than the balance of their investment portfolio or savings account – but having a positive cash flow sure does relieve a lot of stress!
Track spending for 90 days: get a small notepad that you can easily fit into your purse or pocket. Every day for 90 days, track all outgoing and incoming money (even the pack of gum you picked up at the gas station!) For many people, this is an eye opening experiment that shows you exactly where you are wasting money, and often in ways you did not expect until you kept track. Try this experiment over 90 days and see where you can reduce unnecessary spending to put more money toward paying down debts or into savings and investments.
Refinance whenever possible: if you can get a lower interest rate on your long-term debts, you can improve your financial situation by saving money on interest and either pay your debts off sooner or use the savings to boost your assets.
Develop skills people will pay you for: whether you own a business or work as an employee, you need skills that people will pay you for in order to earn money. Almost everyone can be taught the skills necessary to work in low-income jobs, so if you want to increase your financial worth, you need to develop skills you can market as a business owner or an employee who receives promotions. These are not necessarily job-specific or industry-specific skills, and do not have to come through earning a college degree. Decide what you are passionate about, and take time to learn all you can about that topic.
Look for sources of passive income: passive income allows you to earn money without physically trading your time. Business owners who do not actively participate in the day to day operation of the business but earn a profit are earning passive income. Writers who create a book once and then receive royalties every time their book sells are earning passive income. People who buy property and rent it to tenants are earning passive income. There are many ways to earn passive income, and having one or more passive income earning activities is a great way to increase your income and assets. Most passive income opportunities can’t be measured accurately in a net worth calculation since the income is earned over time, and may fluctuate, but having passive income increases your overall financial worth.
Be Happy with What You Have
It’s important to realize that not everyone needs to keep up with the Jones’s or have a mansion or other expensive luxuries in order to feel worthy. If you are completely happy with your current income level then maybe your actual net worth doesn’t matter as much. If the income you currently earn covers your living expenses, allows you to plan for your future needs, and provides for enough of your wants that you are satisfied – then you’re probably already in that “place” in life that many others are constantly chasing through growing their net worth!Related