Why Establishing Net Worth Is Essential
For people who are trying to plan for their financial future, there are countless numbers, data points, and considerations to take into account. But one figure always seems to stand out the most, and that figure is your net worth.
Despite people knowing roughly what net worth is and what it means, many people don’t really know how to assess their net worth, the calculations that go into it, or what type of net worth they should be aiming for. To make sure you’re well informed about net worth, keep reading.
What is net worth?
Your net worth is the value of your assets (both cash and property) minus the value of your debts or liabilities. When you own more than you owe, you have a positive net worth, and when you owe more than you own, you have a negative net worth (not uncommon for people with large debts like mortgages, student loan debts, and car loans).
Your assets include any cash you have and anything you have that can be sold for money, such as investment accounts, property, etc. While your bank accounts and investment accounts have apparent value, sometimes it’s hard to assess your net worth by knowing what value to assign to property that might take longer to sell like a home or expensive jewelry. But a good financial planner or advisor can help you figure this out.
Liabilities are more directly measurable as they are the value of the debts and loans that are under your name. While these take away from your net worth, as you pay them off, your liabilities decrease, and your net worth increases.
Why is net worth important?
Comparing one person’s net worth to another’s will not always be directly comparable. Still, in terms of tracking your financial gains and well-being over time, it can be seen as a good single figure to track your improvements.
Further, the net worth you have is a value that will be looked at for any creditor who is considering offering you a loan or mortgage. A higher net worth means you are able to pay more off and are seen as a less risky investment by creditors.
Lastly, your net worth will hopefully increase throughout your life. So, once you retire, you’ll transition to a fixed income, and the amount of that fixed income will depend on the net worth you’ve been able to accrue. Tracking your net worth over the years will help you track how close you’re getting to the desired net worth needed to retire in the way you want.
A qualified financial planner, such as Tobin & Collins, will be necessary to determine you’re your desired net worth is, as each person’s situation is different. Contact us to help with your financial health goals!