A lot of people do not pay attention to their net worth. As long as their income can pay for all their bills, they are okay with everything. They do not feel the need to dig deeper to understand their personal finances.
That is a huge mistake. When it comes to your finances, what you do not know can destroy you. If you have no idea what your personal net worth is, you might not know that you are already in the red. You might feel secure about your finances when in fact, your spending has slowly put you in the red. After all, there are certain habits that can threaten your financial security. If you are not careful with these habits, you might end up ruining your financial future.
This is actually one of the reasons why you need to maintain a budget plan. This plan will help you see if your income is enough to pay for all your bills. In the same way, your net worth will tell you if you have reached your financial goals (e.g. retirement, home buying, etc).
If you know your net worth, you can also make smart decisions about your life. It will give you a hint if you are ready for marriage. If you have a negative net worth, you need to discuss that with your special someone before tying the knot. This knowledge will also indicate if you are ready for the high cost of having kids. We all know how expensive it is to raise children. The average net worth of a married couple aged 35 years old and below is only $19,526. That is hardly a good net worth to start having kids.
Why you need to know your net worth
Knowing your net worth goes beyond looking at the amount that you have in the bank. You need to consider everything. You have to calculate the cash that you have in the bank and on hand. The assets that you own are also a part of your net worth. If you have any debt, that should be deducted from your net worth.
When you know how much you are worth, that is a sign that you are being responsible about your financial situation. You are taking control of your finances. After all, this will help you make the right decisions about your money.
There are three important reasons why you need to pay attention to your current net worth.
It confirms your financial security
First of all, this will confirm if you are financially secure – which is one of the most important financial positions that you can aim for. According to a study done by Pew Charitable Trust, 9 out of 10 people feel that financial stability is more important than getting a higher paycheck. This may seem like a shock because a lot of people think that a higher income will lead to financial security. That is not entirely true. To be honest, it will be easier to achieve financial security if more money is coming in each month. However, being financially secure goes beyond your income. You also have to spend less so you can save more. The more you save, the bigger your net worth will be.
If you know your net worth, you will understand if you have achieved that financial security. This type of security will vary depending on a person. Some people feel like having a certain amount will make them financially secure. Others would want to own assets. You can have your own definition of financial security but the only way for you to monitor that is by knowing your personal net worth.
It shows your financial progress
Another reason to know your net worth is to gauge your financial progress. Financial goals are important because they give us direction. It can influence all the decisions that you make with regards to your money. If you want to buy something, you need to determine if it is more important than what you are saving up for – like a down payment for your own home. In case you get a one-time bonus from work, will you splurge it by going on a vacation or will you use it to pay off your credit card debts? Knowing your net worth will help you gauge if you are near your financial goal or not. If you are near, you can cut yourself some slack by spending some of the money that you got.
It motivates you
Finally, another reason to know your personal net worth is for motivation purposes. According to a survey, households earning a lot are more inclined to feel confident about the economy. The same is true if you can see that your finances are doing well. It feels good to see that you have a growing net worth. It feels like an affirmation of what you have been working so hard to do. When you know that your hard work is paying off, it gives you the confidence to continue.
How to increase your personal net worth
Now that you know why you should keep track of your net worth, you need to find out how you can grow it. After all, that is the whole reason why you are keeping track of it. You want to see if it is growing as planned.
Here are three things that you can do to expedite the growth of your personal net worth.
Focus on your debt
It is common for people to be torn between saving and paying off debt. Well, if you have enough emergency fund, it would probably be a good idea to make better debt payments before saving more money. It would increase your net worth faster because debts have a bigger interest rate compared to your savings account. When you eliminate the high-interest rate debts, you can free up more money to put into your savings or investment.
Earn more money
Another tip to grow your net worth is to increase the money coming in each month. This can be a side gig or a passive income. Or you can simply ask your employer for a raise. When you increase your income, do not be too quick to upgrade your lifestyle. That will not increase your personal net worth. Live the same way that you did and just put the extra money into your savings.
Invest the money
Experts believe that putting your money in a savings account is not enough. You have to invest it because it will help grow your money faster. The best way to do this is to invest in your retirement. Just decide on an amount that you will save each month and let it grow through compound interest. Soon, you will find that your net worth is steadily growing. If you start early enough, you might be able to fulfill all the signs that will allow you to retire early.
Once you have gotten the ball rolling on your savings, you should keep track and know your net worth. If you are slacking or right on track, do not feel guilty about giving yourself a reward. It will also make you feel good and motivate you to save more.