At the beginning of the year we discussed a few tips that one can follow to ensure financial fitness in 2020. We are almost halfway through the year and as such we must use this opportunity to do a routine financial fitness ‘check up’. The purpose of this article is to present you with an approach for assessing your current financial situation with emphasis on your net worth. At the end of this article you should be able to answer one crucial question:
Are you financially healthy?
In the area of personal finance, there are a lot of different numbers that we are all concerned about. We regularly check the numbers in our bank account statements, investment accounts and retirement accounts. All of these numbers are critically important. However, there is one overarching number that fully captures the effectiveness of your personal finance efforts: Your Net Worth.
What is Net Worth?
Net worth is simply the difference between the value of what you own—your house, retirement funds, investment accounts, etc.— and the value of what you owe such as the mortgage, car loan, other debts and so forth. It is a powerful indicator of your financial health. Net worth is an important number to monitor as it is the most accurate measure of wealth and moves the financial focus beyond income alone. Even if your income is growing, your net worth could be flat or on the decline due to other factors.
Determining your Net Worth
Knowing your net worth is one of the most important aspects of personal finance. The following steps will help you determine your net worth:
Step 1: Add up the value of all your assets. This could be in the form of Real estate you own, Vehicles, Personal possessions, Investments, Provident/Pension accounts, Bank accounts. It is important to use the current market value of your assets in order to obtain a proper valuation.
Step 2: Add up all of your liabilities. This includes everything you owe or any outstanding obligations you have such as: Mortgages, Personal loans, Loans from family or friends, Car loans, etc,
Step 3: Finally, subtract the sum of your liabilities from the total value of your assets. For example, if everything you own is worth GHS 100,000 and you owe GHS 150,000 in loans, your net worth would be – GHS 50,000.
What does Net Worth indicate?
A positive net worth means that assets exceed liabilities, while negative net worth results when liabilities exceed assets. Positive and increasing net worth indicates good financial health and cushions you from financial setbacks because it means you have money to fall back on or assets you can sell to generate cash.
A high net worth is very essential if achieving financial independence is one of your life’s goals. It is certainly cause for concern if your net worth is decreasing. However, it does not necessarily mean you are financially irresponsible; it simply means that you have more liabilities than assets.
Once you understand how your net worth is determined, it is easier to see what you need to do to grow it. In the next article we will address how to increase your net worth and what the ideal net worth for each individual should be. Until then, the question still remains;
Are You Financially Healthy?