Assets - Liabilities = Net Worth. Sounds simple, but not so fast! I speak to a lot of people that don't understand the concept, nor the importance, of knowing their net worth. It may be scary to think about, but if you want to be solid financially, than you need to know these numbers. What is classified as an asset? What constitutes a liability? What does it matter? Who cares?
Listen, put your current yearly salary in a bag and put it outside in the backyard somewhere. In the exercise of figuring your net worth, you won't need to even think about your salary. Forty years from now no one will care 2 cents about what your salary is today!! Seriously, its a frivolous figure that has no meaning once you leave this earth. When you perish, and we all will cause no one's made it out of here alive, you can't leave your salary for your kids and your grandkids!!
What you you can leave is your net worth!! Your net worth stays and helps those that remain here, it can help your community when you are gone, and can be a blessing to others when you are no longer here. Your net worth is also your retirement, what you have left, what you can live on in your older age, and it will ultimately define your standard of living when you get older! Can your salary help your net worth grow? Yes absolutely. But you don't have to have a substantial salary to have a substantial net worth? This may sound controversial to some of you reading this, but you need to sort of minimize your focus on your salary and focus the vast majority of your time, energy, and efforts, on your net worth!!
I'm going to keep the rest of this simple and to the point.
The first half of the net worth equation is assets. An asset is what you own. Assign values to what you own and make sure that those amounts are as accurate, factual, and realistic as possible. Sometimes you have to assign an accurate approximation of a value to an asset because it's actual value isn't known until it's sold and it's not being sold because its in your possession.
The second part of the net worth equation is liabilities. A liability is what you owe. It's easier to be accurate and factual with a liability because what you owe is known. You simply call the company or person you owe the money to and they will be happy to give you that information any time. The difference between your assets and your liabilities is your Net Worth or New Loss!
Get out the calculator and figure your net worth right now. Chances are you have a calculator on your phone so do it. You may be shocked to learn what that figure is, or you may be scared to look at it and avoid it like the plague. The fact is, you need to know it. In fact, you need to compute this figure about every six months or so and develop goals around how you plan to add to this figure before the next 6 months. This is an excellent goal setting exercise.
It's vital that you develop a plan for you and your family. Figuring your net worth on a bi-annual basis and developing goals around increasing it, sets you and your family up for success, and will set you far apart from most people. You must be in the habit of saving, investing, keeping your money, and building your net worth. Understanding and learning what your personal net worth is, and developing ways to regularly increase it, are things that can be done by anyone, regardless of your circumstances.
First things First!!! You have to know where you are financially to start and you have to build up your "money-focus-muscles-and habits".
Start with Knowing Your Net Worth!!!