Net Worth: What Is It and Why Is It Important?

When you think of net worth, you might envision someone with a business empire or a tycoon, but anyone can calculate their net worth, and it's something that everyone should know.

To evaluate your net worth, add your assets (i.e. the cash you have in bank accounts, investments, retirement accounts, etc and the value of properties you own) and then subtract any liabilities you owe (debt, loan, credit card, mortgage). The remaining value will be your net worth.

Net worth is a different concept from income since we buy, borrow and make investments with the money we have, and the total value of one's properties, including cash, goes up and down with time and expenses. Think of it like a screenshot that shows you where you stand on your financial journey.

10 Reasons Why You Should Know Your Net Worth

Key Standard

One's net worth is the most important benchmark to measure a person's overall household and overall success.

Goal Setting

Knowing your net worth helps set your immediate and long-term goals and plan for your future family. It will be at a lower level during the start of your career, but in years to come when your net income will rise with proper training, annual promotions, and better jobs. With careful planning and a budget to follow, you will eventually see an increase over time.

Track Progress

You should track your changes in your net worth to make sure you are making progress and managing your money correctly, and in case you need to make alterations, you can do it when you can.

An Emergency Fund

One should have enough assets and cash in hand for potential problems that are likely to arise. You should have enough funds for unexpected events like a lost job or medical emergency. A money market account is more liquid than your car or home.

For Loan

When you opt for a loan to buy a house, a car or invest in a new business, you must review your net worth to see if you can afford the increase in costs you will be taking on, for which your bank will review your financial statements, including an income statement with your economic history and net worth.

Pay Off Debt

Pay off high-yielding debt, especially your credit card debt, which has the magic of compounding interest against us if we only make the minimum interest payments. Get rid of your balance in full every month.

Finance Mortgages

You can pay off all or some of your mortgage debt if your interest is over 5%. If it is more than that, you should refinance your mortgage, or if you pay a low interest rate, don't make any changes.

Build Assets

Add your limit to your retirement accounts, earn employer's match, and increase your investments in a low-cost index fund. While stocks can go volatile every year, it remains a great place to invest your money.

If you don't own a home and pay high rent, you may consider buying a home while mortgage rates are still relatively low.

Financial Planning

Your road map to building your wealth starts with your net worth and making valuable changes like reduced expenses, more savings, investing, and delayed gratification. Your net worth statement is the financial plan to achieve your short and long-term goals.

Financial Security

Having financial security means not worrying about money and living comfortably with peace of mind. Knowing your net worth is having a tool to measure your financial security at any point in time. Many apps can help you build your net worth, track spending and all critical variables to this statement, and make changes.