When you hear the words “net worth”, you may start to think about what your life is worth in a sense. Typically, your net worth is a complete picture of your financial soundness and where you stand when it comes to your assets, debts, and more. If you ever want to learn what your net worth is, you would (and should!) create a balance sheet that will lay it all out for you. Take a look at my financial stats to see how I track mine.
To figure out what your net worth is, you would take your assets and subtract your liabilities. The final number is what your net worth is. For example, if your assets are $350,000 and your liabilities are $300,000, then your net worth is $50,000. Your net worth will increase and decrease over time depending on what liabilities are removed and what is added.
Your assets are divided into current, intermediate, and long-term. Current assets would include your current cash on hand and near cash. Liabilities are also divided into current, intermediate, and long-term.
So, what does your net worth really mean to you? It is a snapshot of your financial decisions and you will find that when you make good financial decisions, your net worth raises and when bad decisions are made, it will lower.
Just like interest can really help you with your savings, it can also kill your net worth when you are charged it. Let’s take a look.
Interest and your net worth
Interest affects your net worth and it can bring it down. In fact, if you have a lot of credit card debt that carries a high interest, you will find that your liabilities may outweigh your assets and this means that you can have a negative net worth.
There are ways to improve your net worth if you are in this situation and that is to increase your assets, reduce your liabilities, or do a combination of both.
Since a liability is something such as debt, your liabilities can easily go over your assets. The more liabilities you have, the less likely it is that you will have a positive net worth.
Any type of loan, from a credit card to a student loan to a personal loan, can cause your net worth to diminish. If these loans have a high interest rate, you should worry about them because they will impact you negatively. The way they affect you is because they increase the amount of your liability.
For example, if you have a $10,000 loan, but the interest rate on it is 10.75 percent, you may end up with roughly $14,000 of debt. This is $4,000 more than the original loan rate. This additional $4,000 is added to your liabilities. Now do this for all of your loans and credit cards and you may need to take a step back. Here is a great resource to help you learn how to refinance credit card debt.
Improving your net worth
The best way to improve your net worth is to increase your assets, reduce your liabilities, or do a combination of both.
If you have the ability to increase your assets, you should. Whether you come into a windfall of cash, you sell something you do not need, or you obtain another job, the additional cash will help you.
While you may be able to increase your assets, you should really focus on reducing your liabilities. Your liabilities are your debt, so reducing it is really the best option. If you do have high interest credit cards or high interest debt, you want to attack it first. This is because these high interest loans and debt is dragging down your net worth.
The best way to reduce high interest debt is to consolidate and refinance it. You can refinance with a private bank or lender and the process will reduce the amount of interest you pay and will rework your monthly payment. Combining multiple loans into one can also make repayment much more manageable as you will only have one payment to worry about. Another good idea is to start sending a double payment instead of a single minimum payment. You will pay off your loan in almost half the time and save thousands on interest. Here is a great resource to help you learn how to consolidate student loan debt.
Sit down and make a plan
If you want to increase your net worth, you will first need to sit down and make a plan for yourself. You should focus on reducing your liabilities and increasing your assets as much as possible. Remember that when you pay down a liability, you will find that your net worth will increase drastically.