Net Worth Explained – How to Get Rich (Part 1)

Nov 8

Image sourced by Adeolu Eletu @adeolueletu

Let’s unravel the confusion about net worth and get organized around how to accumulate $1,000,000 in wealth.

While financial planners and wealth-builders focus on building wealth and increasing net worth which is important, the real benefit to having a high net worth is gaining peace of mind and security; achieving financial freedom and financial independence; and enjoying the life you desire!

Let’s get to it!

Net worth according to Investopedia, means how much – the total value – assets, money, etc. – you have after you pay off what you owe.

In other words, after you extinguish your debts, how much money you can invest and how much you can spend.

You should calculate and monitor your net worth when You want to:

Track your money.
Figure out where you stand compared to your financial goals.
Inventory your money, assets and liabilities.
Do some estate planning.
Borrow money; and,
Create a financial roadmap for your heirs.

You would create a ‘Statement of Net Worth’ or a ‘Personal Financial Statement’ (PFS).

11 Reasons Why Your Net Worth is Very Important!

Your net worth can help You:

Gain peace of mind.
Achieve financial freedom and gain financial independence.
Enjoy the life you desire.
Figure out how much money you have to accumulate so you can fund your living expenses for your entire lifetime.
Calculate the amount of money you have to accumulate in order to live the life you desire.
Calculate how much money you have to save in order to build your emergency fund.
Calculate how much money you have to save in order to gain peace of mind and sleep well at night.
Gain insight into the state of your financial position – how financially strong or weak your finances are at a point in time.

Typically people calculate their net worth as of a particular date – maybe the end of the month (January 31st, April 30th etc.); the end of the quarter (March 30th, June 30th, September 30th or December 31st); or the end of the year (December 31st; also referred to as ‘year-end’).

Determine where you stand ‘today’ in relation to your financial goals.
Tell you how much more money you have to accumulate in order to reach your financial goals.

A net worth that’s greater than zero ($0) (negative net worth) means that at the end of the day, you have money in your pocket.
A net worth that’s less than zero ($0) means that at the end of the day, you have to pay someone back in order to get back to zero.
If you have a positive net worth, you might take some comfort. But it really depends on where you stand today compared to your financial goals.

Help you determine your ability to borrow money – your ‘Credit Capacity’.

Your credit capacity is how much money a lender can lend you and how much money you can borrow and still be able to repay the loan.

For example, whether you qualify for a loan – to buy a car, buy a house, obtain a credit card, etc.
If you want to buy a car or home appliances, a retailer or finance company will check your credit rating to assess your ‘credit capacity’.

When you purchase a home, the bank will request your personal financial statement (PFS) which again is another name for your statement of net worth.

Next week you’ll learn the key terms and definitions surrounding net worth.

See you then.

To Boost Your Net Worth, click here.

Arthur V.

Disclaimer: OH and Please Remember, we are Not financial advisors, financial planners, attorneys or accountants and are Not providing any specific financial, tax or legal advice here. Be sure to conduct your own due diligence and consult your own professional advisors to get sound professional advice that’s specific to your financial and personal circumstances, risk tolerance, time horizon and investment goals and objectives among other key factors!