There are two ways to increase one’s net worth: increase assets or decrease liabilities. That is all there is to it. It really is a simple equation in principle but very difficult in practice.
This is because we are conditioned by the media, our friends, and many other external influences to think that we need this or that such that when we spend our hard earned money on these items, we really aren’t doing anything to increase our net worth.
Why Track Net Worth?
Tracking your net worth gives one an idea of financial progress. It is calculated by adding up all of our assets and then subtracting the sum of all of our liabilities. The resulting number is your net worth, which can be positive (meaning you own more than you owe) or negative (which means you owe more than you own.)
One number by itself may not mean much (unless your net worth is several million). But being able to follow the trend can help you determine if you are improving your financial situation or not.
Now I am not one to track my net worth on a monthly basis since I don’t want to get caught up in the noise of fluctuations of asset values or debt totals that can occur in the short term.
But I do have times when I am forced to list out all of my assets and their values along with my total liabilities to determine my net worth. Usually this is related to a business loan although in February of this year, it was for a different reason.
With that said, I had to list out the information this past weekend and I am pleased to say that my net worth is up again. I will probably write about it in more detail over at Cash Flow Mantra. However, I did want to make a few comments regarding assets and liabilities.
Understanding Components of Net Worth: Assets And Liabilities
To fully understand the importance of net worth, we have to look at both assets and liabilities and see how they both affect our bottom line.
What Is An Asset?
An asset is anything that you own which has value, although I prefer the interpretation that an asset is something that puts money into your pocket. For now, I will go with the banking definition.
For me, my assets did increase mainly because I kept contributing to various savings vehicles such as retirement and college savings accounts. Even though stocks have taken a hit recently, the overall value was up because of the increased contributions.
I also count the house, car, and some personal property as assets.
So in summary, your assets include the following: