Part One: Money Management in 1 Minute – Net Worth

Many of us think about our financial worth in terms of how much money we make a year. This can be misleading. We all know people that make $90,000 and spend $100,000. They have all the nice things, but are constantly worrying about credit card debt, car payments, and keeping up with the Joneses. The real yardstick of our monetary value is net worth.

Write down all your assets, things of value, (car, home, stocks, bonds, etc.) and subtract that amount from all your debts (student loans, credit cards, car loan, mortgage, etc.). Whatever the number, that’s your net worth. For example, if I have $10,000 worth of assets (car, retirement account) and $27,000 worth of debts (student loans, car loan, credit cards) then I have a negative net worth of $17,000.

Part Two: Reader Question

I keep hearing people talk about net worth, but I’m not sure why it is important. Do you know?

Yep. The reason that net worth is so important is it gives you a snap shot of how well you are doing financially. Many of us only think of how much income we bring in and this is a huge mistake, especially in these times.

We have all heard the stories about people that make high six and seven figure incomes having their homes foreclosed, IRS liens imposed, so on and so forth. How are they making so much money, but losing their homes? The reason why these things occur may be that they do not have a snap shot of the bigger picture. It is easy to feel good about your monetary status when you are seeing checks every two weeks, however let’s dig a little deeper.

Let’s say that person A earns $1,100 every two weeks after taxes. Sounds pretty good right? Well, this person has a beautiful apartment with a rent of $1,100 a month, a car note of $350 a month, and student loan payments of $250 a month. Still doesn’t sound too bad, right? We haven’t looked at the phone bill, cell phone bill, electricity bill, cable bill, eating out every night and clubbing every weekend expenses.

Every month person A puts a few things on their credit card to cover some of the things that they want to buy. There isn’t enough money to buy the things they want, let alone save anything so savings gets put on the back burner. After a year or two of living this way, let’s take a look at this person’s net worth:

Assets $13,500

Savings $500

401k $3,000

Car value $ 10,000

Liabilities $40.500

Credit card $1,500

Car loan $12,000

Student loans $27,000

Net worth -$27,000

This person is $27,000 is debt and adding on to it every month by using credit cards to cover their basic needs! We have to stop looking at our incomes as assets. Too many of us are finding out that our jobs are not as secure as we would like. To have a sound idea of what our financial picture looks like we have to start looking at the bigger picture.

Each of us should know our net worth and credit scores off the top of our heads. Hopefully, this explanation has given you a more clear understanding of net worth and how important it is in your life.