What is your Net worth? The absolute first step to Financial Independence
To reach any destination you need to first determine where you are? So where are you financially? Luckily, a simple measure of your financial health or situation is calculating your net worth.
What is Net Worth? Your net worth is simply your total property minus your total debts.
Net worth = Total Value of Property - Total Debts
In other words, if you sold everything you own and paid off all your debts how much cash would you be left with?
Let's start with your property. Here are a list of common property that may contribute to your net worth:
Checking and Savings Accounts
Cars, boats, and other vehicles
Retirement, Pension, and Health Savings account cash values
Your home and investment properties
Stocks, bonds, and mutual funds
Here are some common debts that you should account for:
Mortgages and Home Equity Loans
Credit Cards debt
Calculating your net worth may take a few days. You may have to call your employer about getting the details on your pension and retirement accounts. When calculating the values of your home or vehicles use a conservative estimate. You don't have to be exact with these values just consistent.
Why is knowing your Net worth important? At the very least you will have a complete list of your property and debts. This can be an achievement for some people in itself. If your net worth comes out to be negative then you have some real problems with debt and spending. Whatever your net worth comes out to be, YOU WILL MOST DEFINITELY WANT IT TO BE LARGER! They say that "If you can't measure it, you can't improve it". I recommend placing a reminder in your calendar to calculate your networth every six months or so. Now that you have a list of all your property and debts, the next time will be so much faster!
Now that you have made your first measurement of your net worth, now is the time to set some goals to try and increase it. When you calculate your net worth in six months, will it be bigger? That depends on your spending habits and what goals you set for yourself. Increasing your income is probably not as easy as reducing your spending or managing your debt so start there. Here are the main ways to increase your net worth:
Increase savings rate
Increase(exchange) the Value of property/investments
Decrease spending rate
What should you next steps be? It should be increasing the value of your assets like maxing out your 401K. You should also reduce your liabilities by reducing spending. Perhaps get rid of cable TV or getting a cheaper phone plan. A great resource for optimizing your finances is ChooseFI.com. So what are you waiting for? Get to it!