Why you need to calculate your net worth: Understanding the basics
As people go through different phases of life, they accumulate assets, debts, and investments. Sometimes, it can be difficult to keep track of everything they own and owe, let alone understand how it contributes to their overall financial situation. That’s where knowing your net worth comes in handy.
Understanding your net worth provides insight into where you currently stand financially and what areas need improvement, serving as a valuable metric for tracking progress toward reaching life goals. No matter what stage of life you are in, whether beginning your career or having built decades of wealth, calculating net worth should become an integral part of managing finances. Here are four reasons why.
1. It helps you set financial goals
Calculating your net worth allows you to set realistic goals and make better decisions for your financial future. This could include paying off debt, building an emergency fund, or investing in stocks or other assets. Once you have a clear goal in mind, it will be much easier to create a plan for achieving it and stay motivated throughout the process.
2. It helps you monitor your progress
By calculating your net worth regularly, you can track how far (or close) you are from achieving financial independence over time. This monitoring process further helps keep track of how much progress has been made towards reaching certain goals, like paying off debt or building up savings for retirement.
3. It allows you to make smart investments
Knowing your net worth is essential when making investments since it helps determine the amount of risk appropriate for your situation. You can decide which types of investments would be most beneficial based on your current financial standing and future goals, whether it’s stocks, bonds, mutual funds, real estate, or other assets that could potentially increase your overall wealth over time.
4. It provides insight into your financial health
Calculating your net worth provides a valuable snapshot of your financial health, allowing you to evaluate your finances at any given moment. This ensures that changes can be made accordingly if there are any discrepancies between what is expected and what actually exists in terms of income, expenses, savings, investments, etc.
With this type of information, it is possible to uncover potential problems early on before they become too large to handle without professional help or legal assistance.
How to calculate your net worth?
Basically, the formula is:
ASSETS – LIABILITIES = NET WORTH
But you can do it digitally and more accurately using a net worth calculator online. Simply add up all of the assets that you own (cash, mutual fund investments, real estate, vehicles, etc.) and any debts that you have (credit card loans, student loans, car loans, or other debts). Click on calculate, after which the net worth calculator will generate a figure that reflects your financial health.
A positive number indicates that you have more assets than debts, suggesting strong financial standing. A negative number means liabilities outweigh assets, signalling a need for improvement in your financial management strategies.
To wrap up
Since the value of your assets and liabilities are not fixed and can fluctuate over time, it’s important to calculate your net worth every six months. Calculating it manually may take a lot of time, however, by using a net worth calculator online, you will have an up-to-date understanding of your finances in just a few seconds. This further allows you to monitor your progress toward achieving long-term financial security and wealth creation.
