You may not realize it, but your net worth says a lot about you. Your net worth says more about your financial status than your income, your house, your last vacation or your car. However, unlike many of the public displays of wealth and status, your net worth is largely unknown to others. And in some cases, it may be unknown by you as well. So just what is net worth and what does it say about you?
First let's make sure we have a clear understanding of what net worth is and what it is not. Think of your net worth as a summary of your financial life: it's everything you own minus everything you owe. Your net worth is your personal balance sheet. It's a snapshot of all of your assets (i.e your home, 401k, checking account) and all of your liabilities (i.e. student loan, credit card debt, mortgages) at one point in time. Your net worth today will probably be different than your net worth tomorrow. Your net worth is not your income, and it's not your expenses.
As a simple example, consider a person whose sole possession is one savings account with $100 in it. This person has no debts, and no other assets. So, as of today, his net worth is $100. If the bank pays him $1 in interest, then his net worth is $101 (ignoring taxes). If, after earning the interest, he borrows $10 from his friend, uses it to buy lunch, then his net worth would be $91 - everything you own minus everything you owe.
Net worth is the cornerstone of financial planning. Your entire planning process begins with an accurate statement of net worth. This is so because before you can imagine what's possible tomorrow, you must understand where you are today.
What I find most interesting about personal net worth is that your net worth is a reflection of every single financial decision you've ever made. The bottom line number directly corresponds to every good decision you've ever made about money and every not so good decision you've made. We've all made some bad decisions about money (financial planners included!). If you started saving often and early in your 401k at work, your net worth reflects that. If you bought more house than you could afford, your net worth reflects that. Even the very small things, like the cup of coffee that you bought yesterday, are reflected to the penny in your net worth. However, some decisions you make decrease your net worth, but were still great decisions - like perhaps paying for your child's college education. And sometimes you run into financial problems that were beyond your control but that still impact your net worth.
I believe that too often we focus on income and possessions as the primary measurements of our financial success. Net worth is a far more important and revealing indicator of not only our financial success, but also of our ability to make wise decisions when it comes to the spending and saving of our hard-earned money. As Robert Kiyosaki, author of Rich Dad, Poor Dad said, "Most people fail to realize that in life, it's not how much money you make, it's how much money you keep".
Knowledge is key and knowledge inspires action. Know your net worth. Know that every dollar you spend has a direct impact on your net worth. With this knowledge, and perhaps without even trying, you may begin to prioritize your net worth more than you have in the past.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment advice. If you have any questions regarding this Blog Post, please contact us.