A lot of us run our own businesses and we have a lot of questions about how our business is actually going. We also have questions about ourselves.
A lot of us want to know our estimated liquid net worth. Our financial worth, not our personal worth as people.
In the majority of cases, this is a very easy practice. Generally, net worth is figured out by subtracting your liabilities from assets whenever you feel like.
To have a positive net worth, you have to have more assets than liabilities. This is why eliminating debt is so serious. Debt is a liability. Liability adds up and crushes your estimated liquid net worth.
Calculating Your Net Worth
Figuring out your net worth is very simple. First, make sure you’ve added up all of your assets and in another column add up all of your liabilities. Next, you subtract your liabilities from your assets. Calculating your net worth is much like a financial look into yourself. It doesn’t take into account your annual income. It instead uses the money you have at that current time. An easy way to boost your net worth is to calculate on payday. Yes, it sounds funny, but net worth isn’t constant so take advantage of paydays.
What Exactly Are Assets?
Assets are basically what you own that is worth any money. Anything that has monetary value is an asset. There are liquid and non-liquid assets that are included in the calculation. Your checking account is a liquid asset. Your home is non-liquid. Assets can include the market value of your house, your cars’ market value, money in investment accounts like 401k and life insurance accounts, checking, savings, and money market accounts, and other rare items like nice jewelry, special furniture, and collectibles. To be careful, don’t use jewelry or artwork in your calculations because their value wavers so much and is very subjective.
What Exactly Are Liabilities?
Liabilities are outgoing money. It is debt that constantly drains your liquid net worth. Your total liabilities aren’t determined by monthly payments for car insurance or other monthly bills, but it is instead your entire debt. Liabilities include mortgages, student loans, credit cards, car loans, owed medical expenses, back taxes, and liens against your paycheck. A lot of average Americans seemingly have a negative net worth and this is predominantly due to the mortgage and car loan they have. These combined are typically far more than any assets they have like the market value of their home and car and their savings. Don’t let it deter you because you can make some small changes and slowly grow your estimated liquid net worth.
- Home Value: $220,000
- Car Value: $18,000
- 401k: $9,000
- Emergency Fund: $2,500
- Savings: $200
- IRA: $4,000
- Total Assets: $276,200
- Mortgage: $233,000
- Car Loan: $16, 750
- Credit Card: $3,000
- Medical Bill: $800
- Student Loan: $25,000
- Total Liabilities: $278,550
- Net Worth: -$2,350
As you can see, having a negative net worth is quite easy and can seem daunting.
What To Do If You Don’t Like What You See
If you are disappointed in your estimated liquid net worth, don’t fret. There are a lot of people who are unhappy with this number, but it can get better. It’s quite simple and it is just a reflection of basic finance and budgeting. Also, the picture of a net worth doesn’t take into account wages and other income so the snapshot you see may not be relevant for long. Using this calculation, you can see what is limiting you from being where you want to be financially.
Start focusing on your primary expenses and then attacking your debt. Seems like the most basic advice, but as you can see in the calculation, debt is a financial killer. It doesn’t care who you are or what you do, debt is a haunting presence that must be eliminated if you want financial freedom and to increase your net worth. Obviously, the house is your most important liability because it is required to live and it is your most valuable asset. Start making larger payments and request that your mortgage guarantor applies the extra directly to the principal. If you don’t inform them, you’ll just pay more towards interest. Auto loan is next because you usually need a car to do what you need to do during the week. Try paying an additional payment every six months, this can drastically reduce the time you spend funding it.
Track Your Net Worth
Yes, your net worth can be very upsetting, but in order to reach your goals, keep an eye on it. If your net worth isn’t improving each month, you’re not doing what you should be. If you’re taking on more debt, yet you’re not increasing your number of assets, you’re doing yourself a disservice. Your net worth is a picture of how well you’re achieving your financial goals at that time. In November of 2017 looks the same as or even better than November of 2018, you’re not paying off your debt like you should be.
Budgeting is easy for most people until they put it into practice. Divide up your pay every time you get paid. Pay yourself (savings), pay essentials, and then pay the debt. If you have a down paycheck, debt has to come last because you can’t live without food, water, and electricity. Once you spend only what is necessary and say no to yourself now you will improve your net worth every month.
What To Do Next
Next, you want to evaluate how you can improve your number of assets. Obviously building a savings is one of those ways, but it can be difficult if you’re barely scraping by. Remember to pay yourself first, that way when the hard times do come, you will have enough money to fund the emergency. If you want, do a calculation each month to see where you are. For a lot of people, it can be scary to see such little progress, if that is you, check every quarter. If you pay yourself first, pay essentials, and then pay a debt, you will see your net worth grow.