There are two ways to increase one’s net worth:increase asset or decrease liabilities.It is really a simple equation in principle but very difficult to practice.That is because we are conditioned by the media, our friends, and many other external influences to think that we need this or that such that when we spend our hard earned money on these items, we really aren’t doing anything to increase our net worth.
Why Track NetWorth?
Basically tracking our net worth gives an idea of our financial progress.But being able to follow the trend can help you determine if you are improving your financial situation or not.Now I am not one to track my net worth on a monthly basis since I don’t want to get caught up in the noise of fluctuations of asset values or debt totals that can occur in the short term. But I do have times when I am forced to list out all of my assets and their values along with my total liabilities to determine my net worth.
Understanding components of Net Worth: Assets and Liabilities
To understand these components we have to focus on both Assets as well as on Liabilities.
What is Asset?
An asset is something that put money in to your pocket.for understanding this we can focus on banking definition.If i take my example my assets are keep on increasing as i keep on contributing on saving accounts,getting interests on my saved money in various banks,share market ,mutual funds etc.I also consider my house,car and personal properties as my assets.
What is a Liability?
Liability is anything that take cash from your pocket.As house is an assest in bank’s view but it still take lot of cash out of budget for such things like mortages,taxes,insurance and maintenance.
In my view making payments and not using credit cards also increase my net worth.
AS WE KNOW THAT Most of us start off poor and the progression to the next level is slow. The poor keep spending money on things they don’t really need. The middle class doesn’t invest enough so they are stuck there for decades. It makes sense that the rich get richer. It’s because they reinvest and make more money than they consume
How to Calculate NET WORTH?
Calculating net worth is not very hard.It just need a pen and a paper.
Make a list of all of your assets
This includes retirement savings, your current checking and savings account balances, any bonds you might have, the total value of any stock holdings you might have, your home, and your automobiles.
Make a list of all of your debts
One should list all of your credit card balances, personal loans, student loans, auto loans, home loans, and so forth. Much like with the assets list, I recommend a big header that says DEBTS, with each debt listed below that on the left side and the amount of the debt over on the right, with the decimals lined up for easy figuring.Once you’ve listed all of your debts, write TOTAL in big letters on the left, then add up all of the debt numbers. This total is the total amount of all of your debts
Take your total assets and subtract from that your total debt. The resulting number is your net worth.
We should not focus on one one side of equation,we should keep a good balance between assets and liabilities for increase in net worth.If we talk out short term progress we can focus on one side of equation but for long term progress we should focus on both sides of equation for healthy financial progress.That’s why i suggest everyone to keep on tracking their net worth.