Updated: Nov 11, 2020
Your net worth is a great way of tracking your financial health, it provides a snap shot view at your current financial position. You may think net worth is only for those people that make it onto the Forbes Billionaires List but actually, it's a super simple way of figuring out where you are financially, and what you need to do achieve your financial goals.
Assets - Liabilities = Net Worth
Assets are the things that you already own, so this could be cash, investments, property, basically anything that you could sell and get cash for. Liabilities are the things that you owe, so any debt that you may have, whether it be credit cards, car finance or a mortgage.
5 Reasons Why You Should Calculate Your Net Worth:
Set Goals - knowing your current financial position can be a useful tool when planning for the near, or distant future as everything is laid out in front of you and can aid your budgeting technique why working towards the future
Track Progress - as Net Worth is relatively easy to calculate, it can be a great tool to monitor your progress towards certain financial goals
Spot Areas To Improve - if your liabilities massively outweigh your assets, it may pin point areas to improve on, for example, you may see a large amount of credit card debt but almost no emergency savings, it may highlight why you end up using debt in the first place
Puts Your Debt Into Perspective - listing your liabilities against your assets allows your finances to be put into perspective and see how the two compare, you might feel overwhelmed by your level of debt, but maybe the situation isn't so dire after all
Prepare For Retirement - ultimately when we retire, we know we need to have a nice amount of money set aside to live off for the years we are not working, being able to track your finances via Net Worth can help you work out how much you need and how long it'll take to get there
It's possible that you may have a negative net worth. This isn't anything to worry about. Through working towards paying off debt, build savings and grown your investments, your net worth will soon start to increase.
When I started my financial journey I had a negative net worth, I have since managed to make it positive, but I want to buy a house in the next few years and this will make it go back into the negatives for a while, until I build up equity in the property.