What is net worth and why is it important?
The official definition of individual net worth: Assets – Liabilities = Net Worth
If your assets are more than your liabilities, then you have a positive net worth. If your liabilities are more than your assets, then you have a negative net worth.
Negative Net Worth Horror Story
There was a time (most of my adult life) when I had a negative net worth. At 21, I got my first fancy job, financed my first (new) car and acquired my first credit card. All this courtesy of producing my undergrad diploma for the credit card company and car dealership, respectively. In hindsight, I think this was some predatory shit for a kid just out of college. I financed the car and I maxed out the credit card.
Girl with zero financial literacy starts her life here…
Car loan: $15,000
Maxed out credit card: $3,000
Let’s look at the numbers: $0 – $18,000 = -$18,000.00.
Voila, at 21 yrs old, I had a negative net worth. Not a fantastic way to get started is it? I know this is nothing compared to the amount of debt people are entering adulthood with today, but it was alot for the time.
(As soon as I drove that car off the lot, the value of the car was immediately less than how much I owed; therefore upside down. Bitches.)
Which brings us to the importance of knowing your net worth and smashing your debt OR never acquiring the debt in the first place. Now is the time to start talking to your kids about finances. Unfortunately, financial literacy is taught at home and most American’s are not literate (I’m not an exception) and the cycle of overwhelming debt continues. The negative net worth horror cycled on for years, but I had a lot of stuff that I didn’t need and the Joneses were impressed. I tried to keep it dialed down, but oddly, the people around me wanted me to have more things.
Positive Net Worth Success Story
In the ensuing years, I’ve never purchased a new car again and I never will. Cars to me are instruments to propel me from point A to B. Nothing more, nothing less. I do wonder what it would be like to be able to plug my smart phone into the car stereo? Is it nice?
What are assets? I don’t think that’s a dumb question.
Cars (paid off)
Gold or Platinum
Good Health (quantifiable? maybe not, but still)
I’ve worked my way into positive net worth because I own my car, have property (for now), artwork, investment accounts and no credit card debt. (There is some question if property should be considered in the net worth formula. I’m on the fence there.)
And guess what? My positive net worth led to a positive self-worth. Win Win. Everyone gets a snickers bar.
What’s my point? As long as you have debt overshadowing your assets, you will never tip the scale in your favor to wealth acquisition, financial freedom and the thrill of it all, compound interest.
The 3 M’s recommended financial planning tool – Personal Capital
Among the many tools I use to steadily trod the path to financial independence, knowing my net worth is, by far, the most useful.
To help you discover your net worth and thread it into your daily life, below is a free financial tracking tool/app called Personal Capital. I like watching the app update on my phone in real time with pretty colors and fascinating bar graphs. I’m such a nerd.
Easily link all your financial accounts to the app and like magic you will see everything in one place. The Personal Capital features include:
- Net Worth
- Cash Flow
- Holdings & Allocations
- Investment Checkups
- and more…
Sign up for a free Personal Capital Account here!
The 3 M’s is using a referral link to Personal Capital.