Your net worth is the amount that you are really worth when you combine your assets and your debts. Your net worth is a good picture of where you really are financially. It helps to put things into perspective, and allows you to focus on building real wealth instead of just accumulating stuff.
You can earn a high salary, and spend a lot of money and have a low net worth. You can earn a lower salary and manage your money wisely and build a high net worth. Australia is one the countries with the highest average net worth of its citizens.
What Is Net Worth?
Net worth is an honest look at how you are doing financially. Instead of judging on the flashy cars and watches to identify how well off someone is, the net worth looks at the actual saving and spending habits and determines how much you are truly worth.
It is possible to have a negative net worth. If you are worried about how you are doing financially, looking at your net worth can give you a good idea of how you really are doing.
It can be eye opening to look at your net worth and determine where you are. Many people are surprised at the number. It may be discouraging, because you do not know how to turn the situation around, especially if you have a negative net worth, but it is possible to do it.
Your net worth is a measure of your financial situation.
Determining Net Worth
It does not take long to determine your net worth.
Before you begin, you will need to gather a list and value of all of your assets, which are the things you own. This can include savings account, bonds, stocks, your cars, your home and other property. You will also need to gather a list of all of the debts that you owe to others.
- Add together all of your assets. You can include items that you still owe money on because the loan amount will be deducted from your net worth later on. You need to only include the property that you could sell. This would be things like art or other high-end collectibles, but it would not include things like your clothing.
- Add together all of your outstanding debts. This should include your mortgage and car loans. It should also include money you owe for student loans to the government, your back taxes and any other personal loans that you may have outstanding.
- Subtract your outstanding debts from your assets. It is possible to have a negative net worth, which means that you owe more than you have in assets. You may have this if you just bought a home or if you have an unusually large amount of consumer debt.
What Does My Net Worth Mean?
Your net worth tells you how you are doing financially, and it is a good number to gauge over the years. If you are really interested in building wealth, you want your net worth to rise at a fairly steady pace. You should check on your net worth each year to see if you are improving your situation. You can also create a solid financial plan to help you reach your financial goals.
A positive net worth means that you are beginning to build wealth. This means that you do not need to worry as much about your monthly expenses.
In most cases, you should continue what you are doing, though you may want to boost the amount you are saving and investing each month. Eventually you will come to a point where your investments are earning more each month than you are contributing and then they will begin to grow very quickly.
If you have a negative net worth, you need to work on changing that situation. It is not uncommon for younger people to have a negative net worth, since they have not had much time to earn money and to increase their net worth.
You need to think about getting on a budget and find ways to regularly save and invest your money. This will help you change your situation. It is important to work on getting out of debt, and to stop using your credit cards or other personal loans to really turn the situation around.
How Can I Change My Net Worth?
In order to change your net worth, you will need to change your spending and saving habits. The first step to do this is begin to budget. This can help you get you find areas where you are overspending. It gives you more control over your finances, since a budget lets you prioritize when and how you spend your money.
Although many people look at a budget as restricting, it can be empowering. You can still spend your money on the things that are most important to you, but it helps you to be mindful of your spending and make sure you are not wasting your money of things of little value.
Once you have a budget in place, you need to set up a debt payment plan. A debt payment plan helps you to focus the extra money you have on your debts. It makes sense to pay off your consumer debts before you begin investing, because the interest rate you are paying will be higher than what you would earn.
To create a debt payment plan simply list your debts in order of highest interest rate to the lowest. You will apply all of the extra money in your budget to your first debt on the plan. After you pay it off you will take all of the money you were paying on the first debt and pay it on the second until it is paid off. Then do the same with the rest of the debts until you are out of debt.
Once you are out of debt, you need to invest a portion of your income each month. When you set aside money in a savings account. The savings is what will turn a negative net worth situation into a positive one.
It can take time to really make a difference in the amount that you save. You should be patient as you put money aside. It will grow into a sizable amount.
Cash Poor with a High Net Worth
You can be broke or feel broke when you have a high net worth.
This happens when the majority of your wealth is wrapped up in assets. When you cannot sell the assets quickly enough, you may find yourself in a situation where you are cash poor, but asset rich.
You may decide that you want to balance out your assets and keep a certain percentage in liquid assets that are easy to access and to sell. If the majority of your net worth is wrapped in you home or other property this can prove even more difficult, especially if you want to sell when the value is lower than average.
Should I Focus on My Net Worth?
While your net worth does give you a good picture of where you were and how much wealth you have accumulated, it might not be what you need to currently focus on.
You may be better off setting short-term goals that allow you to make real changes in your life.
Instead of focusing on your negative net worth, you may want to chip away at the amount of debt that you currently have. Focusing on just your debt may help you to make real progress and allow you to focus more on solving the problem.
Counting Cars and Homes
Some people say that you should not count your cars, homes and other assets you would not sell in your net worth. If you know that you would not sell your home in order to solve a cash flow issue or deal with a financial emergency, you may not want to include it in your asset list.
However, your home is an asset, and for many people their largest assets.
If you do decide to count it in your net worth, you should realize that you do have the option of selling it when you need to raise cash to cover other expenses. The same rule applies to your vehicles. Any jewellery you would not sell should not be part of your net worth.
Keep in mind that net worth is susceptible to market changes. Your property might be worth $650,000 today – and your net worth looks great – but when the property market declines, your net worth will also decline, even though you haven’t changed your behaviour.
Net Worth Distribution
According to McCrindle, the net worth distribution is skewed in Australia, with the top 20 per cent holding 62 per cent of the assets in Australia.
Additionally, the younger the individual the smaller the average net worth with those between 25-34 having an average of just $261, 819, while those between 55 and 64 have an average net worth of over $1,000,00.