What is your net worth?
Very basically your net worth is the amount by which your assets exceed your liabilities.
For the less financially savvy you might be thinking what does that mean? Think of it as the difference between what you own and what you owe. If you own more than what you owe you have a positive net worth. If you owe more than you own you have a negative net worth.
Your assets represent anything that can be converted into cash like share investments, real estate, superannuation, personal property including cars and motorbikes and of course cash itself. Your liabilities include debts such as credit cards, mortgages and student loans for example.
So why should you monitor it?
First of all for perspective – when you see your net financial position (that is your assets minus your liabilities) it gives you perspective of where you currently stand and an initial benchmark to track against as you start to accumulate more wealth.
For most people having enough money in retirement to live a comfortable lifestyle is one of their biggest financial goals but how do you know if you are on track if you don’t even know how much money you will need or if you are progressing towards getting to that target?
If you know what kind of lifestyle you want to live in retirement you can determine how much you will need in total assets to fund that lifestyle. From then on monitoring your net worth will give you clarity as to whether or not you are on the right path.
What are some simple tips to increase your net worth?
- Pay down your debts – start with the debts that have the highest interest rates where the interest can’t be claimed as a tax deduction. Extra repayments reduce interest and this can have a significant compounding effect. As an example an additional $5,000 payment made in the first month of a thirty-year, $500,000 mortgage will reduce the total interest over the term of the loan by about $11,000 (at current interest rates).
- Invest in superannuation – this is the legal way to minimise the tax you pay. It will save you a lot of money over the course of your working life, it’s locked away until retirement, protected from creditors, and is a good way to force your savings.
- Spend less and save more – setting a good budget and monitoring your ingoings and outgoings is the best way to stay accountable
- Invest wisely in growth assets – carefully considered investments have potential to grow, but are also generally less accessible than cash investments and less likely to be drawn down
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Author: Nick Vincent