Find out the Importance of Understanding Net Worth
Knowing your net worth can have a wide range of implications, and the implications will vary as you grow older.
Before we get too deep, let’s define a few terms:
- Your net worth is the amount by which your assets exceed your liabilities, or what you have versus what you owe.
- Assets include investments, bank accounts, brokerage accounts, retirement funds, real estate, and personal items like your car or jewelry.
- Liabilities include your mortgage, loans, credit card debt, student loans, and any other debt.
If we go a little deeper, when we consider assets, they fall into several categories:
- Income generating assets – These will grow and provide resources to live or provide for retirement. Income generating assets include things like your brokerage accounts, retirement funds and other liquid investments.
- Real estate and non-liquid investments – These will grow in value and you may use them at the same time. They include not only your principal residence but also summer homes, collectibles and some jewelry.
- Depreciating assets – These will need to be replaced multiple times in your life, which is something to consider when deciding how much to spend on them. Depreciating assets include cars, household furniture and other personal items.
When we consider liabilities, they generally fall into the same category of something that you want to pay off or pay down.
With this background, it starts to explain why we want to know our net worth.
- It is a key benchmark for understanding your financial success
- It is important in setting short, intermediate and long-term goals
- It is a tool to help track the progress you are making
- It is a tool that will help you be more mindful of your spending
- It is a tool to help you make sound financial decisions
In other words, when you are young, understanding your net worth helps you know if you can afford a new car or a new home, and how much you might be able to borrow to accomplish these goals. As you continue to grow your career and family, it helps you track the progress you are making financially. Finally, as you get older and closer to retiring, your net worth and the types of assets you hold will help you assess how close you are to being able to retire, or what debts you may want to pay off prior to doing so.
As such, regardless of your current financial situation, knowing your net worth can help you evaluate your financial health and plan for the future. Your net worth will fluctuate; however, it is not the day-to-day value but the long-term trend that matters. If you would like help determining your net worth, reach out to us today. Our private client services team can develop customized solutions to meet your individual goals.