Are you financially fit? You may know that you want to change your financial outlook, but you really do not know where to start. One important tool to measure your financial fitness is to determine your net worth. Your net worth is simply weighing your liabilities against your assets.
First, you need to make a list of your liabilities. You need to list the amount that you owe on all of your credit cards, student loans, car loans and any other sources. Then you need to add the list together. This amount is the total amount of your liabilities.
Second, you need to list the amount of all of your assets. This would include your cars, your house, and your savings account. You should list your cars and your home for the amount that they are worth now. Then you will add the list together; this amount is your total assets. You can include your retirement accounts in this list, as well.
Third, you need to subtract the liabilities from your assets; this amount is your net worth. When someone is referred to as a millionaire, this is the number that people look at. It is possible to have a negative net worth. Many people who are just starting out have a negative net worth. Most college graduates with student loans have a negative net worth as soon as they graduate. It is important to try to turn this around as quickly as possible.
Fourth, consider what your net worth means. If you have a negative net worth this means that you owe more money than you have. If your number is greater than your salary then you need to make lifestyle changes so that you can turn the situation around. The first step to doing this is putting together a budget and a debt payment plan. This will help you begin to control your money so you can get out of date. If you have a positive net worth, you should work on continuing to grow your net worth.
When adding together your assets and liabilities you can list your home as an asset as long as your list your mortgage as a liability. The amount you owe will be subtracted from the worth in the equation, and so you will have the amount of your equity added into your net worth. The same things applies to your cars and any other assets that you may have loans on.
One great way to build your net worth is to begin to invest. You can consider mutual funds or real estate as investments. Eventually you should reach a point where your assets bring in as much or more money than your salary. This will help you to grow your wealth much more quickly.
While investing is important, ridding yourself of liabilities is equally important. You should focus on being debt free before you begin investing seriously. Additionally, you should have your emergency fund in place before you invest heavily. This will protect you if the market changes.
What You Need
- A Calculator
- Balances on Your Loans
- Pencil and Paper