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What is Net Worth and Why is it Important?

When you think about net worth, you might picture an internet millionaire or a media mogul – a bigwig with a lot of money. However, anyone can calculate their net worth, and it's a useful statistic to know.

To figure out your net worth add up your assets (the cash you’ve got in bank accounts, investments, retirement accounts, etc. as well as the value of any properties you own) and then subtract any liabilities (debt, including student loans, credit card, your mortgage, etc.) that you owe.

Because we don't always keep every dollar we earn, net worth differs from income. Instead, we use money to buy, borrow, and invest, and the overall worth of our homes and cash fluctuates over time.

What are Assets and Liabilities

Assets and liabilities are key components to your net worth. You’ll need to know all of what you own and owe to tabulate your net worth. Assets are the financial instruments and things that you own.

Liabilities represent your obligations, or what you owe to other people or companies. While they may increase your purchasing power, they reduce your overall net worth because they represent money that isn’t truly yours.

Why Net Worth is Important

Keeping track of your net worth over time might be a good indicator of your financial health. People work hard to earn a living, but what happens once their pay-check arrives in their bank account is not always predictable.

Understanding where your money has gone in the past vs. where you want it to go in the future might be aided by looking at your net worth.

Knowing your net worth may help you see the big picture when deciding on your next financial move, whether it's purchasing a car or a house, taking out debt to go back to school, or setting a new savings goal. However, it won't necessarily assist you in keeping to a daily budget.

How to Raise your Net Worth

Pay own debt - Tackling debt reduces your liabilities. The fewer obligations you have, the more your assets can be used for your financial benefit. Consider using the snowball or avalanche method to get ahead of your debt.

Increase your income - If possible, boost your income by asking for a raise at work or by starting a side hustle. You may also research ways to start a passive income stream, like through dividend investing or buying and renting out real estate.

While net worth is important, don’t forget to consider what you value in your life. Even if your net worth isn’t at the number you’d hoped for, consider other factors. Maybe you have a flexible job that allows you to be available to your family.

Time, freedom, health and happiness are also currencies; they’re not factored into a traditional net worth analysis, but absolutely worth taking into account.

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