In my last article “What Are You Really Worth?”, I focused predominantly on getting you into the mindset of incorporating your finances into your overall health regime, emphasizing that just like your health, it is beneficial for all of us to do a special check-in on our individual financial health. So, the next question is “how do you calculate what you’re worth?” It probably helps to begin by making certain we understand what net worth really means. What is it? How do you calculate, and, ultimately, build it?
Essentially, your net worth represents everything that you own minus anything that you owe in debt. Your assets minus your liabilities. Assets can be cash and investments, your home and other real estate, cars, and anything else that you own. Your liabilities are what you owe on those assets like a car loan, the mortgage on your house, and especially, your student loan debt. Your net worth helps you to measure your financial health by showing you what you would have left over once all of your outstanding debts are paid.
If you’re seeking to build your net worth, then the financial strategies that you create for yourself should always be aimed at increasing your net worth by either increasing assets or decreasing liabilities. We often end up addressing both in tandem. Therefore, every proactive financial decision that you make, such as saving, investing and creating an emergency fund will help to increase your net worth. And the same is true for decisions that we make that counteract being proactive, like over-spending at your favorite clothing store. If you spend too much at the store, you’ve either just decreased your checking account, or increased your credit card debt. Either way, your net worth has just been impacted. This is by no means to say that we should never go shopping again. If you like to shop as I do, that would just be torturous.
Instead, if we had a better understanding of how much money we actually had to work with, our shopping trips would be even more gratifying because they would reduce or even alleviate the stress we experience when we really need to pay a bill or meet another serious financial obligation.
At first, it may appear that your net worth is not being improved by the act of paying off debt, but each time you make a payment on a credit card, this action is triggering lower finance charges. Eventually, less of your money will go to banks as your credit and net worth steadily increase.
But how do you truly build net worth? Saving your money and putting it away in an account or creating an emergency fund is great. However, these strategies usually serve specific purposes, and often don’t contribute to increasing your net worth if your money is sitting in a savings account.
Instead, one of the most powerful ways of building your net worth will be found in the power of compounding. According to the definition found in Investopedia, “Compounding is the ability of an asset to generate earnings, which are then reinvested to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.” (Investopedia.com, 2016 online source)
Have you ever heard the term “let your money work for you”? Well, compounding is one of the common ways to do this. Compounding is commonly implemented when money is invested in the stock market, and it provides an opportunity to potentially grow your money much faster than if it were to simply sit in a savings account at a bank.
It is important to state that there are inherent risks associated with investing in the stock market, and anyone who wishes to invest their money should speak to a financial professional first to gain the best understanding of their personal situation and risk tolerances. There are, however, many potential rewards; because depending on what you invest in, your money has greater opportunity to grow.
You may be reading this and thinking, “Well, I’m a business owner and all of my money has been invested in my business. How do I possibly calculate what I’m worth now?” I’ll definitely cover that in my next segment. For now, I’d like to simply encourage you to start thinking more about what you can do today, to start growing your personal portfolio for your future.
Growing your net worth takes time, patience, and a good consistent strategy, and that should be something that we all take our time to do. After all, aren’t you worth it?