This Is Why Knowing Your Net Worth Is So Important
Do you have any idea about your net worth? There are so many people out there who don’t realize the significance of their net worth. They don’t consider it important because they assume that only celebrities and billionaires should worry about their net worth. Retirement is the only time when they start focusing on it.
Just as a country’s economy depends on CPI or the consumer price index, the GDP or gross domestic price, and the number of unemployed people, your financial health is dependent on your net worth. What is net worth? When you deduct your liabilities from your assets, you get your net worth. Knowing your net worth is crucial if you want to understand where you stand financially in your life. Please go through the following points to know more about your net worth and its importance.
How To Calculate Your Net Worth?
Take a note of your assets first. A simple definition of an asset is something that you own, and that has a monetary value. Common assets that people have are cash, securities, businesses, real estate, and any other property like land, homes, condos, timeshares, etc., collectibles, vehicles, and balance in your savings and checking account.
After listing them down, look towards your liabilities or debts. Something that you owe is called a debt. Common liabilities are your student loans, personal loans, car loans, mortgage, taxes, the outstanding amount on your credit card, judgments, alimony, etc. Calculate the value of your assets and liabilities. Subtracting the debt amount from your asset amount gives you your net worth. Now, why is your net worth so important? Continue reading.
It’s Your Financially Identity
This is the first and foremost reason why you must know your net worth. You wouldn’t be aware of your financial situation if you are not aware of your net worth. Some couples rake in $200,000 in a year and have the intention to retire. They probably have assets worth $1.2 million in their retirement accounts, home equity, and all investments combined. However, some out of them also have liabilities worth $500,000, and that includes their mortgage.
Even if that $1.2 million might seem to be quite an attractive sum, your mortgage payment of $5000 every month might make things a little tough for you, since you are no longer employed and can’t boast of a fixed salary. Your net worth has no connection with your salary. Therefore, having an asset value of $1.2 million doesn’t imply that your net worth somewhat revolves around it. If this is the condition, you would need to think a few times before quitting work.
It Helps Track Your Your Progress Over The Years
With each passing year, your net worth will increase, especially if you haven’t retired. But, how exactly should the growth be like? Though you need to consider a host of factors, it all boils down to your financial condition. According to experts, those who avail of a financial planning advisor’s services and have a proper idea of their net worth have better control of their situation and know how to deal with their financial situation.
It Is An Indicator Of Your Financial Condition After Retirement
This is one of the major points. Suppose you can no longer work owing to health reasons and decide to retire. The day you hang your boots is the day the amount you have saved throughout has to start giving you the financial backup, and this support has to continue till the day of your life. You have to have an amount as your savings to support you through a long retirement period of 20 to 25 years.
It Stops You From Accruing Debts
If you have been consulting a financial planning advisor, they would tell you that even assets worth $1 million won’t be enough to help you survive through a retirement period of 25 years, especially if you have a big mortgage in your name. You will have to pull out your monthly expenses from your retirement savings, and consequently, the amount will get smaller and smaller with time.
Your net worth has nothing to do with how much you earn in a year. Your salary wouldn’t matter here. It all boils down to your assets minus your debts or liabilities. Lesser the liabilities you have, the greater the net worth.
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