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Why Knowing Your Net Worth Is Important
Know Your Net Worth
It can help you to determine when you are and how to get where you want to be.
- You can identify areas where you spend too much money. Do you need it or merely want it?
- Pay Down Debt. You can develop a plan for paying down debt.
- Your net worth figures can motivate you to save and invest money.
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Net Worth = Assets - Liabilities
Your net worth gives an overview of your financial situation at this point. It is the difference between what you own and what you owe.
Your net worth is positive if your assets exceed your liabilities.
A negative net worth is when your liabilities are greater than your assets.
Calculating your assets and liabilities
Assets are anything of value that you own that can be converted into cash. Examples include:
- Investments
- Bank and brokerage accounts
- Retirement funds
- Real estate
- Personal property: vehicles, jewellery and collectables.
- Cash
Your liabilities represent your debts, such as loans, mortgages, credit card debt, medical bills and student loans.
Find your ideal
Determine your target net worth - where you want to be in the near-term and long-term future.
The following formula is helpful:
Target Net Worth=[Your Age−25]∗[1/5∗Gross Annual Income]
A 50-year-old with a gross annual income of $75,000 might aim for a net worth of $375,000 ([50 - 25 = 25] x [$75,000 ÷ 5 = $15,000])
Your net worth can be much more or much less than the amount indicated by the guideline.
Know Your Net Worth
It can help you to determine when you are and how to get where you want to be.
- You can identify areas where you spend too much money. Do you need it or merely want it?
- Pay Down Debt. You can develop a plan for paying down debt.
- Your net worth figures can motivate you to save and invest money.
SIMILAR ARTICLES & IDEAS:
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Key Ideas
Financial planning
...is the process which provides you a framework for achieving your life goals in a systematic and planned way by avoiding shocks and surprises.
Try making a budget
- Create a full inventory of expenses in front of you: Categorize them into fixed and variable; urgent and non-urgent; necessities and luxury; avoidable and unavoidable.
- You can create a hierarchy of needs and decide which one’s to address first. It’s all about prioritizing.
- Accept that you have limited resources and unlimited wants. But you have to manage your resources. The sooner you accept this fact, the better you can control your impulses towards avoidable expenditures.
Maintain a personal balance sheet
It’s a statement wherein you can jot down your assets and liabilities.
- Pull together your bank statements and other proofs of the liabilities
- List down your assets like the bank balance, all investments, home value, and value of other assets.
- Take a sum of all the assets to arrive at the total value of your assets.
- List down your liabilities the (car loan, home loan, credit card balances etc.)
- The sum of all the liabilities will show the value of the money you owe.
- When you subtract the value of liabilities from assets, you get your Net Worth.
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Side Hustle to Make More Money
You don't have to sacrifice all of your free time to start a side hustle, use the time you’re comfortable with and make a little bit of progress every day.
Take Action
Get to working on improving your finances today, not tomorrow. Reading the steps and thinking you’re capable of doing it but postponing it is just an excuse, an unprofitable one.
Communicate With Your Partner
Talking about your financial goals, and scheduling time once a month to go over your finances together can prevent money from affecting your relationship.
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Get The Most Out Of Your Time
It starts with knowing what your time is worth. For instance:
- People who spend their time doing more profitable work make more money.
- People who...
Monetary Value of Time
We all have some idea of how much our time is worth. On extreme ends, it is easy to know if a task is worth your time. For instance, if someone offers you $0.07 per hour and another $7,000 per hour, you would have no problem to decide.
However, in the middle of the time-value spectrum, it is less clear if a particular task is worth your time. While everyone has an hourly value, few people know the exact amount.
The Real Worth Of Your Time
Use the Realized Income Methods to calculate the value of your time. It is based on the income you received and will help you make better decisions on how to spend money day-by-day. You need two numbers for your calculations.
- How much time you spend to earn money.
- How much you earn during that time.
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