Net worth is a topic rarely talked about by savvy shoppers. The truth is that net worth isn’t just a term used by rich people; it is an important topic that is often overlooked by the middle class. Understanding your net worth allows you to gain a better understanding of where you stand financially. Use this quick guide to learn more about the importance of net worth and see how it can affect you financially.
What is Net Worth?
Net worth is a person’s remaining assets after all of their liabilities are deducted. In other words, it is the difference between what someone owns and what they still owe to lenders. Once your assets have exceeded your liabilities, you start to have a positive net worth, rather than a negative one. It isn’t uncommon to have a negative net worth; it simply shows how much you still need to get done before you can achieve your financial goals.
How Much Should Your Net Worth Be?
When we watch the news, we often see people with a million or billion-dollar net worth. For example, Warren Stephens, an investment banker and the 181th richest person in the United States, has a net worth of $3 Billion. This number may seem very high, but don’t let it frighten you.
When trying to figure out your net worth, don’t be surprised if it isn’t the same as Warren Stephens’ net worth. The average American under the age of 50 has a net worth of $84,542. Finances are very personal and everyone has unique goals.
What Should My Net Worth Be?
One of the most popular formulas for determining target net worth is Net Worth = [Gross Annual Income/5] X [Your Age – 25]. This formula helps you get an average target goal, which you can modify to meet your needs. You can try to reduce debt and increase your assets to try and reach the amount you have chosen.
Remember that net worth usually rises greatly as we age. This is often due to retirement funds and other investments maturing. Other factors, such as a career change that provides higher pay, should factor in to your target net worth. Try to consider everything that could impact you financially when trying to determine your net worth.
Tips for Increasing Net Worth
Even if you aren’t trying to become the next Warren Stephens, you should still do your best to increase your net worth over time. Follow these simple practices to help you get on the right track:
• Save money – put money aside in the bank and spend it wisely.
• Invest – find ways to grow your money quickly. This goes hand-in-hand with having an interest-producing savings account.
• Pay attention to retirement savings – monitor your 401k and other special retirement funds, modifying them as needed.
• Eliminate debt – reduce debt as much as possible to help limit your future liabilities.
Not only will these steps help to improve your net worth, they will also help you boost your credit score and residual earnings. Some people have even seen success investing their money in fixed-amount bonds or high-interest savings accounts, both of which wield excellent results.
My Net Worth Is Negative, Should I Be Concerned?
You should never be overly concerned by your net worth, even if it is negative. Knowing your net worth is negative is actually a good thing. It allows you to see that you have liabilities that outweigh your assets. While you should be concerned by having debt, it shouldn’t affect your daily life. Instead of worrying about your negative net worth, find ways to reduce liabilities or increase your income.
In a society that relies heavily on credit and loans to pay for things, it isn’t uncommon for people to have a negative net worth, especially when they are younger. Few people under the age of 30, for example, have a home and car that is fully paid off. They are often still making payments on their education, in addition to any other living expenses they may have. They usually don’t even see a positive net worth until they start paying off these debts or enter into a professional career.
As long as you start taking action over your income, spending wisely and eliminating debt, your net worth should increase over time. If your end goal is to be a millionaire or billionaire by the time you retire, you may need to take a highly proactive approach to your finances.
Knowing your net worth can give you a great advantage over your finances. You’ll get a clear picture of where you stand, so you can better understand how you need to improve. You can set your sights high, like billionaire Warren Stephens, or you can aim for an average worth. The choice is yours.