Net worth - your true wealth
Net worth – why DO I NEED TO FAMILIARIZE MYSELF WITH IT?
If I had to pick three crucial concepts of personal finance management, these three would be featured:
The 50 – 30 – 20 budgeting rule
Having an emergency fund
We already discussed No 1 and No 2 in our blog, so let’s focus on … net worth!
First of all, there is a “net”. What does this mean? Are we talking about net before taxes? That would have been my first association before I learned about net worth. And “worth” – does this refer to “self-worth”? So many questions…
Net worth refers to what you actually own – your wealth once you have deducted everything you owe (another person, the bank, an insurance company …).
The formula states: net worth = your assets minus your liabilities.
Property (real estate)
On the other hand, liabilities include:
Credit card debt
Any other (consumer) loans you might have.
MaINTAIN AN overview :-)
The concept of net worth is one of the fundamentals of personal finance. It serves as a structuring mechanism – or at least that’s how I like to think of it. Why? We humans tend to forget pieces of a puzzle. Applied to personal finance, this might feature you forgetting that you had stashed away savings for retirement. In my very personal case, I tend to forget that I have a small sum of Swiss Franks in a bank account – retirement savings I accumulated while working in Zurich for six months.
By running a thorough inventory of all your assets and liabilities (category by category, so you won’t forget anything), you get an overview of your current and actual wealth.
Note that your net worth might be negative. This happens when you owe more (have more liabilities) than you own (= your assets). If this is the case and you feel shocked by this sudden revelation, don’t.
You can pay down your debts (for example, by aggressively paying down the credit card debt and the student loans and the consumer loans). This is crucial.
The ultimate objective is to increase your net worth. Effectively managing your personal finances by adhering by becoming your very own disciplined money manager is the path to get there. Net worth matters to you, and it will throughout your entire life. It is a guiding principle.
Written by Caroline-Lucie Ulbrich
Finelles Founder. Coach and organizational consultant (ECB, Deutsche Bank and UBS).