For reasons unbeknownst to me, a lot of people I’ve met have proudly stated their net worth in the same sentence as their introductions. Okay, okay, I’ll admit it: they weren’t talking about their personal net worth, but instead, their company’s net worth. What net worth is this: it’s a figure in which represents how much you or your company is worth — is it in good financial standing, or is this a risky venture (or are you a risky person to give a loan to)?
To calculate net worth, all you do is subtract liabilities from assets. What that means is, you add up all of the assets in your name — checking, savings account, investments, houses, automobiles, your retirement account, and subtract it from liabilities, which are usually credit card debt, loans, mortgages, and the like.
Your goal should to be to continually increase your assets. One way you can do that is to decrease your liabilities. In other words, pay off your credit cards. Pay them off in full if you can.
Here’s an example:
You have $10,000 in assets: $3,000 in your checking, $5,000 in savings, and $2,000 in your investment portfolio.
You have $4,500 in liabilities: $2,200 in credit card bills and $2,300 in loans.
So that makes: ($3,000 + $5,000 + $2,000) – ($2,200 + $2,300), which comes out to a net worth of $5,500. But say in the next two years, the assets change to this: $2,000 in checking, $5,500 in savings, $2,500 in investments. Liabilities become this: $1,000 in credit card bills and $1,500 in loans.
Let’s figure out the net worth now:
($2,000 + $5,500 + $2,500) – ($1,000 + $1,500) = $7,500
Although the amount saved in checking went down, the amount owed for credit cards and debt decreased, which only served to increase your net worth by $2,000.
Think of it like this: net worth is amount owned subtracted by the amount you owe. Sounds pretty simple, right?
If tracking all of your assets and liabilities is too much work for you, try using Personal Capital to automate the process. I use it every day.