Why It’s Important to Calculate Your Net Worth Even if You’re Not a Millionaire
The rich and famous have always been identified by how much money they are usually making a year. Most of them make it onto Forbes or Time magazine especially when their net worth tops a few millions. However, what most people don’t realize is that anyone with an income has a net worth. And even though it may not be in millions, it still matters. A lot of people don’t care, so they don’t bother calculating it, but what they don’t know is that this one number is a crucial aspect of their financial health.
Understanding Net Worth
The very first thing you must understand is how having a net worth affects your income and what role it plays in your life. Net worth is basically a difference between your assets and your liabilities – or in plain words, it tells how rich you are at the moment. One of the most common misconceptions people have about net worth is that it is somewhat the same as an income, hence it only matters for the rich and famous.
An income is simply the money you earn from your job or from your own business. It doesn’t exactly include how much you spend or how much you owe. To be able to calculate your net worth, you must figure out the total value of your assets and then subtract it from your total liabilities. Assets are basically everything you own that has some value. For instance, if you own a house that is worth $200,000, but you owe $100,000 on it, then it leaves you a hundred thousand dollars in equity.
Based on the most recent statistics from the United States Census Bureau, the average net worth of a middle-class household in the country is $80,039. However, if you remove the real estate part, this number slumps to $25,000. So this just proves that net worth is not the money that you already have, it’s basically your complete financial report.
It is the simplest and most helpful way to figure out how well you are doing with your personal finances. If you happen to spend way more money than you should have when you go shopping, especially with the money that you don’t even have since you used your credit card, this just means that you are basically lowering your net worth.
Some people also think that paying off whatever debt you currently have won’t affect your net worth at all, but it actually does since the less money you owe, the less you are subtracting from your assets, and that will push your net worth back up. People who earn millions of dollars, but at the same time spending millions more, have a net worth that they can’t exactly be proud of.
Calculate Your Net Worth
Your net worth is not exactly something that you can cheat since that is literally like lying to yourself. Financial experts believe that people don’t really see the importance of net worth since they don’t think it would matter to them because they don’t have millions in the bank. However, this could actually be a way for them to realize how much money they are losing every single time they borrow some by using their credit card or getting an unnecessary loan.
Calculating your net worth may even open your eyes out about your financial state and encourage you to spend your money wisely. Americans now owe over a trillion dollars in credit card debt, and most people think that the reason for this is because they don’t earn enough money. Once you calculate your finances, you may realize that it is not exactly always about how much you earn, but more about how much you spend.
Finding out what your current net worth is may also push you to improve your saving habits, such as having a retirement savings plan or starting and enhancing your emergency funds. You’ll be able to keep track of how well you are doing if you calculate your net worth once a year, and it is something that will definitely make you change your lifestyle for the better.
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