Why Your Net Worth Indicates Financial Success
For many people, making more money feels like the key to financial success. It might be surprising to know, the measure of your financial success is valued by your net worth rather than your income. Let’s take a closer look at why.
Understanding Net Worth
Net worth is the value of the assets a person or business owns, minus the liabilities they owe. For example, you could add up your assets by the value of your home, car, savings, checking, and other items like jewelry or collectibles with a marketable value. Take your asset amount and minus your liabilities, such as the balance on your home loan, credit card debt, car loan, student loans, and any other outstanding debts.
The Big Picture
Don’t be too upset if you see a negative number. After all, it takes time to build wealth. Right now, this should give you a better understanding of why carrying unnecessary debt hurts your overall financial success.
Not all debt falls into the category of negatively contributing to your net worth. Take buying a home, for example. A home is likely the most significant purchase you will make, and unless you have a few hundred thousand dollars available, you will probably finance your purchase. It’s a hefty financial liability in the beginning that can become a powerful asset as you begin to pay down the loan and as the home’s value increases.
The same can be true for a business loan, where the return on investment outpaces the debt, and the debt begins to lower as you repay the loan.
On the other hand, the same is not valid for revolving credit card debt, for example. Because the credit card debt is strictly money you owe to the creditor, it is not an asset. It holds no value in terms of contributing to your net worth.
3 Ways to Increase Your Net Worth
There are three actionable ways to begin building your net worth today.
- Pay Down Your Debt – This is not breaking news, but you should now understand why it’s so important to prioritize reducing debt. Make a plan to attack your debt with any extra money you can spare. There are several ways to hit it head-on, including paying off your smallest debt first and rolling that monthly payment into your next smallest debt.
- Reduce Your Monthly Expenses – Monthly expenses such as subscriptions, eating out, and groceries are not liabilities but are items to easily trim from your budget to find more money to allocate to debts or savings.
- Save More Money – Remember, increasing your net worth is about limiting debt and growing savings or assets. While you’re chipping away at your debt, make sure you have enough money in your savings to cover unexpected expenses like car repairs, vet visits, or doctor visits so as not to lean on credit to cover the cost. Once you have that covered and eliminate your unnecessary debts, you can grow your savings even more.
There’s No Such Thing as Too Much Money
Remember how we said making more money is not the key to financial success? Well, most people wouldn’t say no to making more money, and we hope you won’t either. As you begin to think about paying down debt and building wealth, think through ways to get paid more for the time you spend working. Consider asking for a raise, pursuing a higher position within the company, or adding extra income to your account through freelance or other side work.Although building wealth takes time, you can make easy changes today that will supercharge your financial success.