Knowing Your Net Worth – Its More Important Than You Think
Net worth is the amount of money you have left over after you have subtracted all your liabilities (or in other words debts, such as truck payments, mortgage and other payments) from your assets (savings, investments, etc).
This number changes overtime, therefore it is viewed as more of a singular snapshot of your financial health at a specific time. But don’t let that make it seem like it is less important than it is. Knowing your net worth is extremely important in making future financial decisions, especially if you want to growth your net worth.
So why is it important?
As I said above, it provides you a picture of your current financial health. This is important because as markets and stocks change over time, your net worth is also going to change over time. If there is a trend of lowering housing values, then it is important to know where your net worth is at because your house may also drop in value.
Knowing your net worth can allow you to do a few key actions that will help you improve your financial health:
Assess your debt
Knowing how much debt you have compared to your assets will give you a better picture of where your money should be going if you want to pay down that debt. It can also help you determine if you can, or maybe should not make any more debt incurring purchases.
It gets you into the habit of checking all your accounts
If you don’t check your accounts, how do you know if you are in good financial health? Getting the habit of checking your accounts will allow you to be in touch with how your money is leaving your accounts, and if there are some habits you maybe should try to curb. It can also be motivating to see your accounts grow!
Not just you needs to know your net worth
Sometimes mortgage bankers and other lenders will want to see what your net worth is before they lend money to you! If you already have a ton a debt and not many assets, then they are less likely to feel confident in your ability to pay back the loaned money.
You can now set goals
Now that you have calculated your net worth, you can set goals for the future. This is especially important because at certain points in your life, you will want to be working on increasing that net worth and paying down the last of your debt, such as in your 40’s and 50’s. Whereas in your 20’s and 30’s you will be looking at incurring some new debt, possibly for a new house or vehicle, and knowing what you are able to afford is important to staying within your means.
It will give you peace of mind
Once you have been regularly checking your net worth, you will have a better control on your finances, and will likely have created some goals for the future. This means that you will be more prepared for the big things in life, like houses, job changes, etc. that can impact your financial wellbeing. Knowing where your net worth sits, and where you want it to be can give you peace of mind because you have made the first steps to reaching your goals.
I hope you are thoroughly convinced that knowing your net worth is important. Next time you are in your banking app, take a good hard look at what debts you have, what your savings are, and where you want to be in 5 years. Do these things set you up well for your goal? If not, determine what you need to change! We all have to start somewhere.
For more information on Managing your Finances, check out this post!