Can you tell me the last time someone asked you what your net worth is?
The answer is probably “never”.
It might surprise you to know that wealthy people discuss their net worth quite often!
How do I know? I worked on a trading desk for years, and the partners would openly discuss each other’s net worth regularly. If the market was down big, they’d make comments like “I just lost 10% of my net worth this week.”
The “average Joe” rarely, if ever, thinks in terms of net worth. They think in terms of income, especially salary.
I’m sure you’ve heard people say things like “did you hear how much so and so makes?” Or maybe someone was bold enough to ask you what YOUR income is.
So…what is your net worth?
It is the total number of your assets, less your liabilities.
Your net worth is the true barometer of your financial status, not where you live, what you drive, what you wear, or even how much you make.
Your net worth is “life’s scorecard”. It measures how intelligent you are at managing your income.
Most people are not aware of this, but studies show that only 30% of your income determines your net worth. That’s why 60% of professional athletes are broke five years after they retire. They have very high incomes, but they suck at managing their money.
The biggest factor that determines your net worth is how well you manage and invest your money.
In the world of personal finance, your net worth is right up there with your credit score. However, most Americans rarely think of it this way because the media never, ever promotes net worth. All they want to do is shove debt down our throats.
From this day forth, I want you to keep track of your net worth.
You should evaluate your net worth at the end of every quarter. It’s easy:
1) Add up all your assets. What do you own? Examples include cash, equity in your home, 401(k) and IRA balances, other investment accounts, stocks, bonds, the surrender value of a whole life policy, jewelry, metals, and other items of value. What do you own?
2) Then subtract your liabilities. What do you owe? Liabilities include mortgage, car note, credit card debt, student loan balances, medical debt, and anything else you owe. What do you owe?
The answer to this simple calculation is the amount of your net worth.
And yes, for many people, this number will be negative, because many of us OWE more than we OWN.
If you have a negative net worth – and many, many good people do – it is something you must work to change immediately. You do this by eliminating existing debt, not taking on new debt, increasing your income, saving, and investing.
That last part, investing, is important, because investing is what makes your wealth grow, through compounding. I explain this in detail in my short guide, The Stock Market is For Everyone.
Focusing on net worth will change the way you look at your finances. At least it did for me.
Until next time!
Click the image of the book at left to be taken to its Amazon page. (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)