Have you ever wondered if your net worth really matters or not? I’m here to tell you your net worth definitely matters. However, it might not matter in the way you think it does.
Why Net Worth Matters
Your net worth is calculated by adding up the value of all of your assets and then subtracting the total amount of your liabilities. What’s left over is your net worth. Another way to look at net worth is by considering how much money you’d have left over if you sold all of your assets and paid off every dollar of debt you have.
Realistically, you’ll never sell all of your assets and pay off all of your liabilities at one time. So why is this number important?
Net worth is an easy way to look at where you currently are with your finances. If your net worth is negative, you know you owe more than you own which is not a great spot to be in. Of course, it may be perfectly fine if you’ve just recently graduated from college and have some student loan debt. However, if your net worth is negative and you’re 10 years from retirement, you’re in a pretty bad spot.
The number isn’t perfect, but you can make some general assumptions based on what your current net worth is. You’ll have to take into account other factors such as your age, occupation, salary and other life events, but your net worth at least gives you a hard number to consider.
Measure Your Net Worth Based On Your Goals
So how exactly should you use your net worth? I personally use mine as a measuring stick for my goals. Since my net worth statement lists out all of my assets and liabilities separately, I can see detailed information and high level information all in one place.
Whether you’re trying to become debt free or save millions for retirement, your net worth statement can show you your progress. You can even see how quickly you’re making progress against your goals if you measure your net worth every month or every quarter.
If your liabilities are decreasing by $5,000 a quarter, you can figure out that you’ll only have 9 more months until you finally pay off that last $15,000 of debt, assuming you can keep up the pace.
Don’t Use Net Worth As A Comparison Tool
Whatever you do, don’t consider net worth as a comparison tool. I doubt you could get many people to divulge their net worth, other than personal finance bloggers, but no two people have lived the same lives.
While someone else may have a net worth in the millions by age 35, others may be just emerging into a positive net worth after paying off massive credit card debt. There is no point in comparing yourself to your neighbors, friends or even bloggers because every has different goals and different life experiences.
What really matters are your future plans and how you stack up against those. That’s where net worth can be most useful to you.