Even if you make $200k a year, you can’t consider yourself “wealthy” if you don’t know your true net worth. A high salary doesn’t always correspond to financial well-being, especially if you’re not tracking your spending and paying attention to your debt.
Not sure what net worth is? It’s nothing complicated. Simply put, it’s the sum of everything that makes you worth something (financially speaking). Add up everything of value you own and the funds you have in cash and investments, then subtract any debt you have to calculate a comprehensive view of your money.
Now that you understand the concept of net worth, let’s talk about why paying attention to yours is vital if you want to stay on top of your finances.
It Helps You to Look at the Big Picture
Knowing that you have $7,000 in the bank isn’t helpful if you don’t know how much money you have in debt. On the other hand, some people have less cash in the bank but own several valuable investments or pieces of real estate. Therefore, you really can’t understand how financially successful you are until you see your net worth, not just a number in your bank account.
Additionally, net worth allows you to think long-term. It’s something you measure on more of a year-to-year basis rather than month to month.
Net Worth Allows You to Track Your Progress Over Years
Even if you track your spending weekly, you should take time every year to evaluate how your overall worth has changed and why. This will help you build a more complete understanding of your finances and what affects them, especially debt and investments.
According to The Balance, there are certain net worth goals we should all have at different points in our lives. For instance, by the age of 30, the site’s experts recommend that your net worth at least equivalent to half of your annual salary. I am more more aggressive. In a perfect world, you’ll have $250,000 saved by age 30. By age 40, it should be worth two times your annual salary.
Obviously, this is somewhat subjective, but the point is that everyone should set long-term money goals for themselves, and net worth can help with that.
You’ll See How Much Debt Weighs You Down
As I said before, a high salary and loads of money in the bank won’t make you a wealthy person if you’re weighed down by monumental debt. Sometimes, the only way to see the true impact of your credit card debt, car payment, and house mortgage is to add everything up. For example, you could have half a million in the bank but only be worth $100,000 if your debt is dragging you down.
Add up all of your investments and cash, then subtract all of your debt, including good debt (mortgages, student loans, etc.) and bad debt (credit card payments, car loans, etc.). Then you’ll get an accurate picture of your real financial worth.
The Bottom Line
When it comes to personal finance, your bank account is only a tiny portion of your monetary wealth. There are a million other things to consider, and a comprehensive breakdown of your net worth will help you evaluate everything.
If you’re not great a math, you can easily have the website Mint calculate your total net worth for you. Just add all of your accounts, from investments to credit cards, and then watch as the site begins tracking everything. Even if you don’t use it for daily transaction monitoring, it’s great for watching your net worth’s changes over time.