What is net worth? And why does it matter?
Your net worth is a great barometer of your financial health.
When I began my journey to end my ‘not smart’ money practices that had followed me around my whole life I wanted to know the real truth of how bad things were in my personal finances.
To start, I made a list of my debt. That was an awful eye opener. Then I made a list of my assets, what I owned (the free and clear part) and what I had in the bank (not enough).
The difference between your assets and liabilities is your net worth.
In my case several years ago, my net worth was a negative number. We owned a house but had paid very little towards the principal. We had cars, but as we all know, cars are depreciating assets, and we still had car payments. We had a small 529 for the kids. A tiny bit in savings. But nearly 6 figures of debt.
It is really not a complicated number to figure out but it is eye opening to see what your financial situation really is.
Seeing our net worth made me angry at myself but it really motivated me. When I talk about drawing that line in the sand, this is that moment when you see your money health in black and white and say ‘no more’.
And what is more upsetting is that we made a really decent living. There was no excuse for having a negative net worth.
Which brings me to another point to jump on my soap box.
I hear lots of people talking about how much money they make, but what do you hang on to?
Most people don’t build any serious wealth because they spend it all.
An actor can make $50 million a year but if they squander $51 million, their net worth is in the red, negative.
But a single mom who has a solid money plan, has paid off her debt and now automatically saves 15% of her income each pay period – may have a very healthy net worth. Better than the athlete.
Understanding your net worth helps you see the full money picture.
Once I saw I had a very negative number, I was able to prioritize what I wanted for my financial future, set goals and change bad money habits.
My initial money goal was to have a net worth of $100,000. But since I was nearly $100,000 in debt, there was that hole to climb out of, plus add the positive $100,000. So this was really a positive money goal of + $200,000.
That net worth number $100,000 went straight onto my dream board.
From there I looked at our spending. Then set a budget. Then eliminated areas where we were over consuming. Once the small debts started to fall away and I had my $1,000 emergency fund in place my money story started shaping up quickly.
We took on more work. We spent more thoughtfully. Seeing the progress just propelled us and lit a fire.
Once that $100,000 net worth was achieved we kept prioritizing our financial well being. We wanted to be 100% financially secure. It was a sacrifice but the long term benefits were going to be worth it.
Building the foundation for a successful financial future isn’t easy and there’s definitely a bit of self reflection. So when I suggest these exercises I know that it can be rough and some times jarring. But I know that giving yourself this financial health check will be a great starting point, the first day of the rest of your money life.
The goal is to be moving in a positive direction and knowing your net worth will be the easiest way to gauge that.