Everything you own minus everything you owe is your net worth. An individual’s net worth takes into cognizant all his financial assets and liabilities. That personal possession that puts money into your pocket is considered an asset. Those things that reduce your earnings(depletes your resources) are said to be liabilities.
It is important to be realistic when trying to calculate your net worth because most of the possessions you own are opinion-based. This means what you consider as an asset could be seen as a liability to another person.
To have complete control over your asset calculations, consider looking into possessions or properties that you can convert to cash easily. This could be anything from your home, furnishings, vehicles, Arts, Jewelry, Investment portfolios, Businesses, Cash, etc.
Calculating your liabilities may come in the form of debts. They are but not limited to Mortgages, account payables, Car loans, Personal loans, Credit card loans, students loans, Bank loans, overdrafts, taxes, etc.
It’s important that you consistently calculate your net worth so that you can track your financial activities, and positioning. Then you can work towards improving them.
How to calculate your net worth
When your assets exceed your liabilities, you are said to have positive and good financial health. However, if your liabilities exceed your assets, then, you have negative and bad financial health. It is a good idea to find ways to increase your assets and reduce your liabilities
knowing what your assets and liabilities are, you can calculate your net worth by following this simple formula;
NET WORTH = TOTAL ASSETS – TOTAL LIABILITIES
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Why you should calculate your Net Worth
Periodically, calculating your net worth will help you reach financial independence. Once you get into this habit, you will be conscious about increasing your net worth, by decreasing your liabilities and increasing your assets.
Reality sets in:
If you do not take time to dive into your financial portfolio, you will be living a flash lifestyle. It will certainly look like you are in millions, in reality, you are not. You could be owing someone or some establishment. Whereas, knowing where you stand, your financial faucets become all clear to you.
Knowing your net worth curtails overspending
Once you get a feel of where your money goes, and where it shouldn’t, overspending will be curtailed. You won’t spend money on things you do not need, instead, focus on the essentials. But if you do not have any headways around your finances, it’s unavoidable that you will spread yourself thin, and probably live in debt all your life.
Helps you stay out of debt
Calculating and knowing your financial stands will help you stay out of debt. You will learn to put off money for your investments and pay off your loans periodically. The loan sharks won’t be found on your neck, neither will your bank. This is because numbers don’t lie, you will watch where everything goes, and maintain a balance.
You shouldn’t be caught owing more money than you own, this is where knowing your net worth helps. The numbers will reflect your position. You will know if your assets are increasing or decreasing.
Find ways to improve your finances using your net worth as reference
Understand that you will not be able to increase your finances if you’re not making any efforts. You have to learn to watch where your money comes from, and where it goes, save consistently, and invest in ventures that will yield good returns.
Invest in yourself, by learning skills that will fetch you money shortly especially if you are in your 20’s 30’s or 40’s.
Right here, right now, you have to care about your financial life so that you will take the improvement of your net worth seriously. It will require patience, dedication, and consistency to achieve this feat.