21 Aug Personal Finance 101: Your Net Worth
Is “net worth” just a phrase tossed around by pretentious men who drive Jaguars or does the average person need to worry about it? No matter who you are, calculating your net worth is an incredibly important step in a financial analysis.
Fortunately, net worth calculation is fairly simple. Net worth is determined by subtracting your liabilities from your assets.
But first, what is considered an asset and what are liabilities? Broadly speaking, assets are everything you own. An asset includes an automobile valued at above $25,000, an investment portfolio valued at $100,000 or greater, and a primary residence with a $250,000 or more value. Additionally, other major items you possess are also factored into the calculation.
Liabilities are items you owe money on, such as outstanding mortgage debt of $100,000 and a $10,000 car loan.
In essence, net worth is the amount of cash you’d have in hand after you sold all significant possessions and paid off any debts. However, it is possible to have a negative net worth. After selling your possessions and putting all of the money you have toward paying down your debt, the amount of debt you still owe is your negative net worth.
An increasing net worth demonstrates good financial standing, whereas a decline could be caused by operating at a loss or a decrease in the value of your assets. A profitable company will be rewarded by a rising net worth and will experience an increase in their stock value.
How does positive or negative net worth influence your personal finance decisions? First, it demonstrates the dangers of falling too deeply into debt. While a negative net worth might be acceptable for someone two years out of college, a negative net worth should not follow you into adulthood. But don’t worry– budgeting and spending wisely will eventually create a positive net worth.
Good financial decisions raise your net worth, while financial mistakes will make it plummet. Observing how your net worth changes over time helps you understand what aspects of your financial planning are working and which need improvement. You should aim to calculate your net worth on a monthly basis, instead of yearly. The sooner you realize that your net worth is suffering, the sooner you can make adjustments to restore your financial security.
At the Bank of the Lowcountry, our brilliant team can help you choose the best personal savings strategy, balance your budget, and increase your net worth. Contact a representative today for full-service, personalized care that meets your financial needs.