Your financial net worth is the difference between your assets and liabilities. Your assets are the things you own that go up in value or generate income. Typical assets include cash and cash equivalents, vehicles, equipment, investments, land, shares, buildings, etc. Liabilities include the money you owe to other people. For example, salary loans, business loans, car loans, credit, mortgages, etc. would be considered liabilities.
Calculating your net worth can reveal many things. The net worth may be positive which is a good thing. This implies that you have more assets than liabilities. It may be negative which means you’re technically bankrupt because your liabilities exceed your assets. It may be zero if your assets are equal to the liabilities. The net worth may also reveal your risk exposure and liquidity status. If you have too much debt it means you are highly leveraged and have too much risk exposure. What you want is to limit debt exposure to utmost fifty percent of your assets. If you have little cash it means you have low liquidity and may struggle to meet day-to-day expenses. Ideally, you want to have cash reserves to last you at least six months.
Tracking your net worth over a period of time will also reveal your level of diversification per asset class and the progress you’re making towards your financial goals. You want to achieve a good level of diversification to mitigate the risk of loss in any asset category. You also want your net worth to grow over time as you save and invest.
It’s pointless to try and compare our net worth with other people. We are all on different life trajectories and face different challenges every day. You should only gauge whether you’re making progress on your financial goals or not. Comparing yourself to other people is a sure way to unhappiness and dissatisfaction.
In conclusion computing and tracking your net worth will create a lot of awareness in your financial life and it’s critical to improving your financial well-being.
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