This One Important Number Says Everything About Your Financial Health
Do you know your net worth?
Actually, first -- do you know what net worth is?
What is Net Worth?
At its heart, net worth is really simple: It’s the total value of all of your assets, minus the total value of all of your liabilities.
So if you add up the value of everything you own, including all your investments and all the money in your bank account…
… and then subtract all the debt you owe, including everything from your student loans and mortgage to taxes…
...the number on the bottom line is your net worth.
It’s also the number you’re talking about when you sit around speculating about how much your favorite TV star is “worth."
It’s a pretty simple calculation -- but ultimately, it’s a theoretical number.
No matter what your net worth is, it most likely isn’t equal to the amount of cash you could access today -- or even in a couple of weeks.
Unless, of course, you’ve sold all your possessions and live out of a backpack and only have $200 in cash to your name… or you’ve decided to give up money completely.
To actually obtain your net worth in cash, you’d have to sell everything you have and settle all your debts, which is a process that sounds so time- and labor-intensive you should be glad it usually only happens after you die.
All that to say nothing of the unfortunate fact that, for a lot of us (read: anyone with any as-yet-unpayable debt, so just about every person who’s ever gone to college in the U.S.), net worth might actually be a negative number.
At the time of this writing, I fall into that craptastic statistic myself, owing to a particularly un-smart money move I made before I got my TPH gig. Oops.
But maybe we’re getting a couple of steps ahead of ourselves.
Cool, I Understand Net Worth… But Who Cares?
Why does knowing your net worth matter?
Well, from a pragmatic standpoint, it’s a metric lenders use to decide if they’ll loan you any money. If you ever want a small business loan, for instance, you’ll probably need some net worth -- no matter how stellar your credit.
But even if you’re not planning on taking out any kind of loan, net worth is a powerful personal finance tool.
Basically, it boils down your financial health into a number. And tracking that number carries the answer to a powerful question: Are you gaining wealth?
Or are you losing it? Even if you’re not in actual debt, failing to invest and earn comes at an opportunity cost.
Furthermore, tracking your net worth can help you achieve your personal finance goals. It makes your money matters -- which are so frequently abstract and digitized and not in your hands -- tangible and distinct.
And it also makes paying down debt that much sweeter.
“Even though I don't like having to pay a monthly mortgage payment,” says financial writer Danny Kofke, “every time I do so I am increasing my net worth.”
It’s kind of like gamifying your finances.
If you stick a fast number on your goal, it makes it that much easier to think about it in terms of a score -- which can be even more motivating than dollar signs.
Ready to Calculate Your Net Worth?
So. Want to know your number?
If itemizing all your possessions and other assets seems labor-intensive to you, never fear -- the ‘net is awash with calculators that make it quick and painless.
If you already use Mint religiously to track your budget and spending habits, you can find an accurate figure for your net worth there, too.
And even if you go the pen-and-paper route, it’s not as bad as it seems. You don’t actually figure everything you own into your assets, because many items lose their resale value pretty quickly -- or didn’t have much to begin with.
“Clothing” and “household goods” might figure into your assets, writes certified financial planner and enrolled agent Mathew Dahlberg. However, if you “were forced to sell these items to raise cash, the secondhand value (would be) significantly less” than what you might think -- and maybe even negligible.
In short, your sweatpants probably don’t figure into your net worth, unless you own these.
Once you calculate that fateful figure, you can assess how much financial work you’ve got to do to get it where you want it to be.
And as it happens, we’ve got some posts to help you get started.
First things first: It’s time to sit down and set some tangible financial goals. One of them might be achieving a specific net worth!
If you find yourself in the red, you’ve gotta fix that first -- and fast. Here are 11 creative strategies for paying down credit card (or any other) debt as quickly as possible.
Finally, find some new ways to earn a little extra cash. You can only make so many cuts -- but with these flexible, smart ways to make some money on the side, you’ve got lots of ways to bolster your income.
Giving your financial status a good, hard look is the first step, so congratulations -- you’ll be in the black before you know it.
Your Turn: What are you going to do to increase your net worth?
Jamie Cattanach is a staff writer at The Penny Hoarder. Her writing has also been featured at Word Riot, DMQ Review, Hinchas de Poesia and elsewhere. Find @JamieCattanach on Twitter to wave hello.