Money can’t buy happiness, they say. Tell that to someone facing daily harassment from lenders. Or to someone who has run up a substantial financial liability which she/he is unable to meet. This is where a person’s net worth comes in.
Net worth is not income.
A person earning a hundred thousand dollars a year may have a net worth of $50,000 if the liabilities amount to $50,000 a year. On the other hand, a person earning $50,000 a year, who has invested over the years and built up assets of two hundred thousand dollars, has a net worth of $200,000 – twice the other person with double the income.
What net worth means?
It is the total value of what you own, your assets, minus the total value of your liabilities, or what you owe. Add up the value of all that you own and subtract the total of all that you owe: that gives your net worth.
A high income does not mean high net worth, although it can help build net worth faster if a person does not fritter it away recklessly. The lesson is, don’t be a “Henry”. Henrys are “high-income earners not rich yet.”
Now is the time for your New Year resolutions, take account of where you stand in this regard. The year 2020, the year of COVID-19, wreaked havoc on the economy, led to income losses, ruined many businesses, and left many jobless.
Those with low net worth were impoverished and only those who had something to get them through difficult times managed to cope with the situation despite suffering a hit.
Net worth about managing personal finance
Net worth is about managing personal finance and being responsible and judicious in seeing where your money goes and what it brings to you in return. It involves the entire gamut of budgeting, banking, insurance, investment, loans, retirement planning, and saving for exigencies.
This would include taking into account all necessary regular expenses over food and medicines, fees, bills, payments, credit cards dues, taxes, and loan repayment that you have to make.
This involves close monitoring of cash flow – income and expenses – for saving for financial or economic freedom that is essential for mental peace and a tension-free life when you are old, no longer able to work and make money anymore.
Characteristics of those who become millionaires
They don’t make it an issue of prestige to buy a used car, buy clothes, or live in a modest home. Those are of no use if they add to your liability and take away your economic independence. They avoid getting into debt and prefer to invest and save enough to buy something rather than take a loan for it.
This is what building good net worth is about. It will help if you make adjustments to ensure there is some amount left for investments to build funds for financial security and future needs or exigencies.
It means investment in real estate and having a house, investments in mutual funds, bonds and gold, life and health insurance policies, and other such means of financial security.
Personal Financial Statement Account
It helps assess the state of your finances and your net worth and provides an essential guide to the direction you’re budgeting, and financial planning should take. It should list your assets and liabilities, assessing both on the overall market value. It should give the market value of your investments as well.
However, in planning for the future, you need to consider the real value the money would have in the future; in other words, you have to consider the factor of inflation.
What a dollar could buy 20 years ago may not be available for 20 dollars now. That is, $20 now is equivalent to $1 20 years ago. The value of cash, thus, declines with time. The value of real estate usually rises unless the prices have been hiked artificially by real estate developers, as seen in some countries in the past decade.
That does not mean saving cash or investing in mutual funds or bonds for money later is a bad idea and should be avoided. All it means is that you have to keep more for that money to be enough. It also means that you should invest in real estate early to become costlier with time.
You need to keep an account of your expenses – what you are spending on and how much. Plan your expenses and curb the impulse to make unnecessary purchases – avoid temptations. Saving is compulsory and, finally; you must pay attention to credit scores and reports.
A good net worth provides security like little else can. It gives you peace of mind and relieves you of the tension of getting through life without being a burden on society or anyone else. It takes some methodical planning and investment and implements a good retirement plan that ensures you can live it up when you are no longer working and do not need to.
Author Bio: Koby Mahon is the tutorial consultant at the best assignment help service provider company Online Assignment Expert. Koby is an avid financial blogger also, currently attached to Online Assignment Expert, providing Finance assignment help to scholars connected to the service provider mentioned.