What is Net Worth and How Can I Use It?

What is Net Worth? Have you heard the term and wondered what it was and why successful people talk about it so much? In this article you'll learn what your net worth is and how you can use that information to your advantage.

What is net worth?

Have you ever heard the term net worth? Do you really understand what it means? If not you really need to know it.

It summarizes all of your finances into one simple number and really tells you where your personal finances stand.

I know it sounds like a horrible financial buzz word. But it is extremely valuable to understand.

The first thing that comes to mind for most people when they here net worth is some rich billionaire like Warren Buffet or Donald Trump. It’s not just for rich people!

It’s so important to understand it and will help you going forward to understand your personal finances much much better.

What is Net Worth?

So by your now probably like, what is it?! Ok, ok, now that I’ve stressed the importance, here is what it is.

Basically it is a simple formula:

Your Assets - Debts

Here is a simple example to get you started on calculating your own:

Assets:
House - $100,000
Car - $10,000
Bank Account - $1,000
Investments - $9,000
 
Total Assets = $120,000
 
Debts:
 
Mortgage - $94,000
Car Loan - $5,000
Credit Card - $1,000
 
Total Debt = $100,000
 
Total Assets $120,000 - Total Debts $100,000 = Net Worth $20,000

 

Your assets is your cash in your bank account, in your pocket, in your bedroom, basically wherever it is. Any physical assets you own like your house if you own one and your cars if you own those as well.

You probably already know this, but debts are all your loans. Mortgages, school loans, car loans, etc.

The bottom line is that this is how much money you are actually in possession of. It's your total financial picture in one number.

If you thought of your money as a game. It is your score!

So you may be wondering how is this that helpful? Well here is how you can use this number to your advantage.

How Can I Use My Net Worth?

So now that you know what it is and how it is calculated, each time you consider a major financial transaction think to yourself how it will affect your net worth.

You want to focus on increasing your net worth over time and making financial decisions that support that.

For example taking more debt like credit card debt decreases the value of your net worth. That’s not good.

Increasing the value of your assets like your house, your investments, or your bank account increases your net worth which is good!

Most all positive financial decisions and transactions increase your net worth and build your wealth.  This makes it a great indicator of your financial health and where it is going.

How Do I Automate My Net Worth?

Calculating your net worth can take some time if you have to do it from scratch every time and most people’s net worth calculation is probably more complicated than the above example.

So how do we make this simple and fast to get?

Automate it!

I use Mint to calculate it and I can see it automatically calculated for me within a minute!

If you don’t use Mint or want help on setting up the right way check out my blog post: Money Automation: The Complete Money Picture.

That post will guide you step-by-step through the process of setting of Mint the right way giving you a complete picture of all of your personal finances.

So how does this give us your net worth automatically? You will add all of your assets into Mint first.

You add each account such as your bank account, investment accounts, etc. You will also add in your physical assets like your house or car.

The best part of doing this in Mint is that once you put it in, it will automatically keep all of the balances up to date for you!

It will even pull the most current estimated value from Zillow.com for your house and KBB.com for your car. How cool is that?!

You will also add all of your debt accounts. If you have credit card accounts, a mortgage, a car loan, etc, you can add those accounts as well and it will keep track of the balances of those automatically as well.

So.. If you have all of your assets being automatically calculated and all of your debts being automatically calculated, you know what else it can automatically calculate?

You got it, your net worth!

Just by pulling up Mint on my phone or the web site I have within a minute an automatically calculated net worth. How cool is that??

ACTION STEPS

Now that you know what it is and how valuable it can be take action on it! If you’re not already monitoring your net worth start today.

In fact, you should start within the next 24 hours or you probably won’t do it.

Action Step #1 - Calculate Your Net Worth with the simple spreadsheet I created to help you right here.

Action Step #2  - If you are take it to the next step, created an automated net worth so you never have to manually calculate it again. Learn how step-by-step in my article here: Money Automation - The Complete Money Picture System.

Action Step #3 - Create a habit to monitor your net worth and use it when making financial decisions. Strive to be pushing your net worth up every month, increasing your wealth and your financial independence.

Now, get started tracking that net worth!


David K. Shepherd

David Shepherd is the creator of Let's Automate Your Life. Learn how to automate your money and free yourself to do what you love!

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