The Importance of Knowing Your Net Worth
Persons, just like companies, may create their own financial statements.
Companies have a balance and a statement of quarterly results.
What would be the equivalent for the case of a person?
The idea behind financial statements is to know the state of the company and
how much money was earned during the last period of analysis. The same applies to persons.
That’s why we always want to budget our spending and have a clear photo of the current state of our personal finances.
Calculating Your Net Worth
Your net worth is the amount by which your assets exceed your liabilities.
In simple terms, net worth is the difference between what you own and what you owe. If your assets exceed your liabilities, you have a positive net worth. Conversely, if your liabilities are greater than your assets, you have a negative net worth.
Calculating your net worth provides a photo of your current financial situation. It is the same as the balance sheet in a company. Regardless of your financial situation, knowing your net worth can help you evaluate your current financial status and plan for the future.
One of the challenges in calculating your net worth is assigning accurate values to all of your assets. For example, if you have a car, you won’t give it the full price you paid initially. Instead, you must give it a lower value after you have been using it.
Another example is your home. If you own it, it is probably your most valuable asset and can have a significant impact on your financial situation.
What Does The Net Worth Mean?
If the figure is negative, it means you owe more than you own. If the number is positive, you own more than you owe.
For example, if your assets equal $100,000 and your liabilities are $50,000, you will have a positive net worth of $50,000 ($100,000 – $50,000 = $50,000).
If the situation was inverted and you had more debt than the things you own, it means you are in a fragile situation. However, it’s not necessarily bad. For example, if you are a student and took a loan to finish your degree, probably you will be fine when you get a job.
Like any stock from the market, your net worth will fluctuate. However, it is the overall trend that is important. Ideally, your net worth continues to grow as you age.
You should also calculate your monthly spending and income. In that way, you will be aware not only of the current situation but also of the continuous aspects that affect your personal finances.
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