A person’s net worth is the ultimate determinant of their sum wealth. The net worth is the result of deducting liabilities from the assets. Calculating the net worth gives one a clear picture of the total cost and earned and spent in a lifetime. Tracking the net worth helps one keep their goals and perspective in check. For example, if a person’s total amount of assets amounts to $200,000 and liabilities equals $300,000, the individual will have a negative net worth of -$100,000. It is crucial to establish the financial status of a person or an enterprise so as not to accrue a deluded sense of net worth and fail to achieve success.
Reasons why it is imperative to track the net worth
1. Considering that net worth is the honest reflection of a person’s wealth, it is a perfect way to determine if one is making positive or negative financial progress. Bob Berger of Forbes.com, states that a constant or increasing net worth is a sign that investments are bringing positive returns. A declining net worth means that one should deduce which activity is draining the money and work towards adjusting the situation.
2. A clear picture of the net worth eliminates the notion that income is equal to one’s wealth status. A person earning $500,000 per year with liabilities amounting to $200,000 in a year is worth $300,000. The same result applies to an individual making $350,000 with liabilities amounting to $ 50,000 annually. With this concept in mind, it is easier for one to plan the steps towards realizing financial success by reducing liabilities to increase the net worth. Besides, considering the assets only when establishing net value, such as a home or a successful investment, is a misguided way to achieve success. The difference between the property and the liabilities like debt determines the exact net worth.
3. When applying for a loan, most banks and lending firms will evaluate the borrower’s sum net worth to determine credibility. A bad credit loan automatically disqualifies one from receiving the cash. Keeping a positive net worth helps one acquire a higher credit limit that can be helpful in expanding one’s investments and ultimately reach goals.
4. A good net worth is essential in keeping the debt status in perspective. A significant amount of loan offsets a lot of people. However, if one’s net value exceed the amount, then it is clear that the debt level is not extreme. A loan that exceeds the net worth means that one should probably cut down on the amount borrowed and live within affordable ways to amass wealth. A low net value to loan ratio is also a great motivation for one to find means to realize a higher rate that translates to increased prosperity.
According to Investopedia.com, the net worth is bound to experience fluctuations just like the financial health of any other industry. As a result, the net worth will reflect the status of the financial health of the various assets and liabilities. It can be difficult to establish one’s long term goals and short term goals without a clear picture of the money owed and money earned. Determining the ultimate net worth with the help of a financial analyst, or a convenient net worth determining software application will save one the stress that comes from tapping into savings and investments, and accumulating unwarranted debt.