A few weeks ago, we started a new Bright Ideas series called BrightDime Basics, where we’ve been covering everyday concepts we need to understand to have a simpler, healthier financial life. So far we’ve explored assets and liabilities so the natural next step is Net Worth. It is, by definition, the combination of the two prior topics.
Assets (own) – Liability (owe) = Net Worth
Net Worth is the value of the assets you own (the cash in your wallet, your 401(k), your car or home) minus the value of the liabilities you owe (the debt from your credit card, student loans, or mortgage). If you used all your assets to pay off all your liabilities, what you have left over is your net worth. It could be positive or negative depending on your individual situation and where you are in your career. Net worth is a simple way to measure your financial progress; is it increasing or decreasing? If you’re saving money and your investments are growing, your net worth is increasing. If you’re spending more every month than you’re earning, then your net worth is decreasing. Because net worth is a simple summary of your entire financial picture it’s a good (but not perfect) measure for understanding your financial situation at a glance.
Net worth example: let’s say you have $1,000 in a savings account and a credit card balance of $400. In this simplified example you have a net worth of $600.
$1,000 (asset) – $400 (liability) = $600 (net worth).
Paying off the credit card may seem like it doesn’t affect your net worth, but in the long run it will. You transfer $400 from your savings account (decreasing the value of that asset to $600) to your credit card balance (reducing the liability to $0). Your net worth today doesn’t change; it’s still $600.
$600 (asset) – $0 (liability) = $600 (net worth).
But in the future you’ll pay less in interest on that credit card which will increase your net worth. Making decisions now that increase your net worth in the long run is a big part of achieving financial wellness.
Want to see what makes up your Net Worth? Login to BrightDime and check it out.