Every few months there is a list published of who the richest people in the world are. They usually have the person’s name and how much money they have accumulated.
The newspaper concerned has calculated that person’s net worth.
Your net worth is a measure of your financial health because it tells you what you would have left over, if you sold all your assets to pay for all your liabilities. Every financial move you make should be aimed at increasing your net worth. This means either increasing assets, or decreasing liabilities.
It important to know your own net worth and it is a very easy calculation:
- List your assets (what you own), estimate the value of each and add up the total.
- List your liabilities (what you owe) and add up the outstanding amounts.
- Subtract your liabilities from your assets to determine your personal net worth.
Every time you make one of those debts smaller or one of those assets larger, your net worth will increase. You can increase your net worth by paying off your debts, saving, investing money and reducing your spending.
Your net worth goes down when you spend money on “small” things such as clothes, food and unnecessary items. Whenever you buy something frivolous, your net worth goes down.
It is useful to calculate your net worth every month. Have a goal to increase your net worth over the previous month, which means your expenses for the month was less than the income of the month.