How to Calculate Your Net Worth & Why You Should

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Ok we are going to kick things off by helping you calculate your net worth.  Don’t worry, it is going to be easy, and you can probably do it in about 20 minutes or so.

The reason we are starting with this is because it is how we are going to measure the success of the rest of this course – as well as all the other great financial decisions that you are going to be making from now on!

Your net worth is a better way to accurately see the big picture of your finances and it is what financially savvy people use to track their progress.

The simple definition of it is:

Assets (stuff you own) – Liabilities (debts) = Net Worth

It is simple to calculate and I will get to that shortly, but first…

1 Why Net Worth rather than just debt?

Your Net Worth is more encouraging

The primary reason for using your Net Worth as a gauge of your financial progress rather than the amount of debt you have is because it is more encouraging. When you look at your amount of debt to track progress you are only seeing the fruit of paying down those debts. On the other hand, your Net Worth increases for every good financial decision you make.

For example, you can increase your Net Worth with the following actions:

  • Paying off credit cards or car loans
  • Paying more towards your mortgage
  • Buying property
  • Funding a Roth IRA
  • Contributing to your 401(k)
  • Building an emergency fund
  • Buying index funds, mutual funds, or dividend paying stocks
  • Or even just not spending as much money

There are many more things you can do to increase your Net Worth, but these are some of the bigger and more common ones.

2 It changes how you think about buying decisions

The second reason I prefer to use my Net Worth to track my progress is because I have found it helps change how I think about my buying decisions.

One of the most valuable financial lessons I have learned can be summed up in two words: buy assets . What I mean by that is you should spend more of your money on things that will keep cash in your pocket. So they should at the very least:

  • maintain their value
  • but better yet increase in value
  • and the best would be increase in value and provide you income as well.

On the other hand you should avoid buying

things that are going to take cash from your pocket. Coincidentally, these are most of the things most of us spend our money on. When you buy clothes, food, electronics, decorations, cars, entertainment, you are (generally) using cash to for something that is going down in value and therefore decreasing your Net Worth. Examples of this would be:

  • Spending $200 on new clothes
  • A $50 steak dinner
  • Getting the new iPhone
  • Going to the Yankees game
  • A brand new BMW

Think about how much you could sell each of these for 2 years from now. Each one of them is a depreciating asset. so 2 years later they would not be worth what you paid for it, if anything at all. But if you had spent it on…

  • Buying property
  • Funding a Roth IRA
  • Contributing to your 401(k)
  • Building an emergency fund
  • Buying index funds, mutual funds, or dividend paying stocks

You would have a much better chance that it would be worth at least what you paid, and it would more than likely be worth more than you paid for it.

Obviously there is more to life than Net Worth, and you can never avoid spending money on depreciating assets, but you can avoid spending ALL of your money on depreciating assets. This is the key to why many people never get ahead financially. They spend all of their money on stuff that goes down in value. Once you start buying things that increase in value, you begin building a snowball that just grows larger and larger, faster and faster.

I don’t want to get the cart ahead of the horse, so lets get back to our Net Worth. The reason I mentioned this is because I want you to be thinking about the end result of each buying decision. None of the things listed above are necessarily wrong, but they should be thought about and decided upon rather than just reacting to what you “feel like doing”. Your Net Worth will reflect each buying decision that you make – good or bad.

How to calculate your Net Worth

There are 2 ways that I’ve used to calculate my net worth.  The new way that I have been using is by using Personal Capital. Basically it is an extremely secure website that allows you to monitor (not make changes) all your financial accounts in one place.  It is completely free to use, and provides a great snapshot of your overall financial picture.

It is the quickest and easiest way to calculate your net worth and continually monitor it over time.

All you need to do is:

Source: christianpf.com

Category: Forex

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