What is your Number? Building Your Net Worth

There are two primary vital signs for your finances, one is your budget (or cash flow) which we discussed in the prior blog, and the other is called your net worth which we will discuss today. Just as a doctor takes your heart rate and blood pressure as a first indication of general health; you can look to these measures as indicators of your overall financial health.

Net worth is the sum total of the value of what you own versus what you owe: Net worth equals your assets minus your liabilities. This will give you a snapshot of where you are at this point in time, like a company balance sheet. My book goes into more detail about how to calculate and utilize your net worth. In summary: you can list all of what you own, and then make a second list of what you owe. If you own assets totalling $500,000 and owe about $200,000; then $300,000 is your net worth today.

What does your number mean? It can help you map your financial wealth building over time. Your number is a sign of financial health that is relative. Generally, net worth increases with age, but depending on your life events (like illness, costly education, or a divorce), it could be negative. Remember, you want to see progress, so you ideally would like to see an increase over time.

How can you use this number? You can measure it annually to map your financial progress. If it is declining, you may want to look at your cash flow, as if you have negative cash flow that will erode your net worth by decreasing your savings or increasing your debt. You may also want to look back on how you bought and sold assets, and if you feel those decisions were optimal for you. Another way to use it is as a progress indicator to your ideal material wealth. If you want to have $1,000,000 net worth, and you currently have $300,000, then congratulations you are 30% there!

Your net worth is a financial power number, it will be very useful over time.

Are you happy with your number?

Disclaimer: This article if for educational purposes only and is not personal financial advice.