Everyone strives and grinds to attain financial success. Most people equip themselves with savings and reduce any form of debt that severely impacts their total value. But to know the real state of your financial standing, what information do you really need to know? Is it the digits in your savings account? Your monthly income? Your diversified investments? You need to consider all of these to one degree or another, and their total value will tell you your net worth.
Net worth is defined as the overall value of all your assets, goods and possessions, minus all your debts and financial obligations. It is the number of assets you possess that exceed your financial liabilities, and it is the perfect measure to know your financial worth. That is why you fairly hear it when Forbes announces the world’s richest people, and ranks them according to their respective net worth. To give more clarity on this subject, here are some of the important points of knowing your net worth.
It Is Who You Are, Financially
It is important to know your net worth because it is the most reliable and accurate way to measure your wealth; your financial status. Wealth can be defined as the value of anything left when you have paid off all your obligations; the exact definition of net worth.
For example, let’s say you are earning around $500,000 per year, but you have an annual amount of $400,000 consisting of debt and mortgage. After paying off your debts, you may think you are only left with USD $100,000, but no. You probably still have possessions like vehicles, gadgets, and luxury items. They are defined as assets and should be included in your worth. That’s why some people opt to buy real estate properties, amass luxury brand items, and collect rare paintings – all these items add to their wealth.
Fully Understand Your Cash Flow
When you know your net worth, you will have a better understanding of how your cash flow works. If you only focus on amassing assets, but fail to guard against incurring excessive debt, then at the end of the day, you will end up with zero worth. Your net worth is a good guideline to know whether you are actually staying in the green in terms of positive cash flow. Positive cash flow means you have more money coming in than money being spent in a given period.
It Encourages You
When you know the right way to gauge wealth, you will begin to subconsciously make decisions and take steps to improve your wealth. The habit of casually checking or updating your net worth will motivate you to do better and better as time passes by. Seeing the actual financial growth will inspire you to do your best, and make better decisions about accruing more wealth and assets.
You Will Learn To Diversify
Since you know what net worth is, you will be pushed to do some form of diversification. Diversification of your assets and income will prevent any threat of loss due to economic factors. For example, if you are aware that the biggest contributor in your wealth is your salary, but there is a looming threat of massive layover in your industry, then you know that you’ll either need to seek new employment, or perhaps invest into something that will hold its value or become more valuable with time, while you are able to afford it, to quickly diversify your assets.
You can come up with solutions to minimally impact your wealth like taking on a second job or investing in the other forms of your assets. Diversifying your income will help you mitigate any economic factors that can decrease your wealth. Relying on one specific asset for living is a tricky financial choice; it is better to invest in multiple industries and sectors, or purchase assets that increase in value.