Knowing one’s net worth is essential to assessing and comparing past, present, and future personal financial positions. It requires an individual to calculate the value based on assets minus liabilities. This equation is much more complicated for a business that employs thousands of people and earns billions of dollars. For an individual, even with modest wealth, it’s a fairly simple and straightforward calculation.
Why Net Worth Matters –
A person’s net value reveals how much an individual owns and owes. For many people, their biggest asset and debt is their home. The amount of mortgage or credit owed also affects an individual’s credit score and ability to be approved for a loan. Someone who has no savings in the bank, owns no property, and earns minimal income generally is considered to have a low net worth. If their credit score is bad, finding a lender willing to take the risk of loaning cash to them will be difficult.
On the other hand, if a person owns property, such as a home, it can be used as collateral for taking out a substantial loan. Without some type of collateral to back a secured loan, the individual won’t qualify for big loans through conventional banks.
Calculating the value of personal possessions and debt periodically will help a person determine where they stand financially and what they’re capable of doing with their money. It can be helpful in starting a small business and might even attract venture capitalists.
Another reason to calculate one’s net value in dollars is to view personal finance beyond income. Some people are simply unable to save money or plan for the future because they spend most of their money as fast as they get it. These people are comfortable with celebrating the “here and now” aspect of life, but often are unprepared for emergencies.
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Assets vs. Debts –
The first step to turning one’s finances around is to make a list of all personal possessions that have significant value. Besides cash itself, a home, and a car, these items may include investments such as stocks, collectibles such as jewelry, or equipment such as laptops or other computing devices. Creators might own intellectual property such as patents, copyrights, or trademarks. Investigating the current market value to these items will help determine a ballpark estimate of the total value from adding the amounts.
The next step is to make a list of debts, which may go beyond credit cards. Many people see medical bills and unpaid taxes added to their liabilities. Other forms of debt may include a student loan, a mortgage balance, or the amount still owed on a vehicle loan. Unpaid debts get worse as interest adds up over time or payments are missed. A missed payment can have devastating effects on your credit score.
Dealing With Finances –
People who take money seriously are usually more likely to spend time figuring out their current financial positions than those who go on spending sprees for fun. Many people don’t want to think about money either because they gravitate more to other lifestyle concerns or they’re not a big fan of math.
But in the age of smartphones, it’s now relatively easy to calculate money issues with a calculator in one’s pocket. Various apps are available to make accounting easy. Still, many people would rather play with numbers in video games than evaluate their personal financial scoreboard.
Running up credit cards to pay for disposable entertainment can be an addiction that leads to despair once the massive debt is realized. An individual can free themselves of falling into a debt trap by paying attention to costs and funds available for spending. But it all starts with understanding the purposes of savings and investing. Even credit can be a powerful tool for people who already have valuable belongings. Yet, it can destroy someone’s finances if they try to live off of credit alone.
Instead of winding up in a big financial hole, one can operate from a sense of financial clarity and responsibility by taking inventory of their property and debt. This favorable financial position opens the doors to many more options and opportunities.
The ultimate goal of money is to be in control of it rather than being controlled by it. The best way to get on that path is to take accurate accounting of spending and realize both the opportunities and value of net worth. Seeking help from a professional certified credit counselor can help get one’s finances in order at a faster pace. Reach out to Advantage CCS and our team of certified credit counselors for free counseling and help!