There are a variety of financial tools and calculations available that can help you better understand your financial standing. You probably have heard the term “net worth” used at some point. This is a financial tool that can provide you with some important information about your finances.
Here’s what you need to know about your net worth.
1. Your net worth considers your assets.
To calculate your net worth, you subtract your liabilities from your assets (Net worth = Assets – Liabilities). Assets are resources with financial value. To put it simply, assets are what you own. Examples of assets include cash, investments, the value of a house, the value of a car, or any other resource of significant value.
2. Your net worth considers your liabilities.
A liability is something owed. In the context of net worth, this is typically debt. Mortgages, automobile loans, student loans, credit card debt, and personal loans are all example of liabilities.
3. Your net worth is a helpful indicator of your financial health.
Again, to determine your net worth, you subtract your liabilities from your assets. The result can indicate the extent of your financial health. As an example, a real millionaire is someone with a net worth of one million dollars. In terms of finances, they are usually in a healthy place. Those who find themselves with a negative net worth are in a very financially fragile position. While a person’s net worth is not the only indicator of financial health, it certainly is not one to ignore.
While a person’s net worth is not the only indicator of financial health, it certainly is not one to ignore.
4. Your net worth can be increased by reducing debt and increasing savings.
How do you increase your net worth? You either increase your assets, decrease your liabilities, or both. Some common ways to increase net worth include reducing debt and increasing savings. These two money moves have an immediate impact on net worth.
5. Your net worth can help you make smart money decisions.
Understanding how net worth works can help you make smarter money decisions. How? By asking, will this decision increase or decrease my net worth? Money decisions that increase net worth are typically wiser decisions than those that decrease net worth (taking on debt). Considering your net worth can also help you avoid putting too much money into depreciating assets, like cars. Depreciating assets decrease in value over time, bringing your net worth down with them. On the other hand, appreciating assets increase in value over time. For most people these will be their investments, like index funds, and real estate.
6. Your net worth does not consider your generosity.
It is very important to note that net worth does not consider generosity. In fact, generosity can decrease your net worth. This occurs because you are moving cash, an asset, out of your bank account. According to Scripture, generosity is the foundation for real financial health. As Christians, we start with generosity. So, while your net worth can be an important indicator of your financial health, it is not the be-all and end-all.
7. You are more than your net worth.
Whether you have a high net worth or negative net worth, it is vital to take that number in context. A person can have a very high net worth but be far from God. A person can have a lower net worth but closely walk with God. You are always more than your net worth. Your identity should not be found in a net worth statement, but in Christ. Pay attention to your net worth but be careful not find your identity in it. Use it a tool to help get you financially healthy for the sake of advancing God’s Kingdom