Knowing your net worth is important. It helps you understand your full financial picture.
More importantly, it gives you a starting place for creating smart money goals. You get the lay of the land. Then you get insight into how to traverse that land to get to where you want to go.
Of course, your net worth doesn’t say anything about your value as a human. Look at it with an eye toward the data. Examine it with your goals in mind. However, never use this number to beat yourself up for not being in a better place, yet.
Calculate Your Net Worth
Your net worth is a number that clarifies where you stand financially. You calculate it by:
- Adding up all of your assets
- Adding up all of your debts
- Subtracting your expenses from your assets
Therefore, your net worth may be a negative number (if your debts are higher than your assets).
You can’t move forward blindly with a financial plan. As a result, knowing your net worth is always beneficial.
Set Small and Large Financial Goals
If you want to make changes then you need to set goals. As you examine your assets and debts, you should get some idea of goals that you want to set.
For example, you might see that your car loan is one of your largest debts. Once the car is paid off, it’s an asset. Therefore, your goal might be to pay off your car within a certain time period.
Identify your ideal net worth at retirement. Break that down so that you have net worth goals for every five or ten years leading up to that point. Then further break that down into small goals that you can meet monthly and annually in order to achieve those larger goals.
Make a Payment Toward Debt Today
Reducing your debt is one of the most important things that you can do to increase net worth. Sort your list of debts into two categories:
- Debts that can become assets once paid off (such as vehicles and homes)
- Other debts (loans, credit cards, etc.)
Focus on paying off the “other debts” first. Get organized. Do the things that you know you need to do when paying off debts. For example:
- Refinance or use a balance transfer or personal loan to reduce interest rates on debts.
- Then sort debts by interest rate. Furthermore, pay off the highest rate debts as quickly as possible.
- Cut back on all spending in an effort to pay off debts.
- Schedule regular payments that exceed your minimum balance to repay debts quickly.
Remember, this isn’t a time to beat yourself up. Yes, you have debt. That’s okay. You know your net worth and your goals; therefore, you are empowered to work towards debt repayment in furtherance of those goals.
Imagine how good it will feel to get to the point where you’re making payments on debts that can become assets – such as your mortgage. Then imagine how great it will feel when that is paid off. You can do this.
Increase Income and Investments
Increasing your assets is the other side of the coin. You can work on this even as you reduce debts. For example, you can work more, which gives you increased income and also allows you to repay debt more quickly. Here are some other things to do to increase assets:
- Develop and increase passive income streams.
- Contribute the maximum amount to your retirement fund.
- Keep more money in savings than in checking. Use interest to grow your income.
- Begin investing your money.
What is your number one question about growing your net worth? Share in the comments and we’ll try to answer it.