If you’ve done any research on improving your finances, you may have heard about one’s net worth. This is the value of all your belongings, whether non-financial or financial, minus liabilities. It’s a good idea to understand it because it indicates how financially healthy you are.
Debt counts against your net worth and is considered a liability. For example, if you graduate and have student loans, chances are good the number will be negative. That would be true unless you had a large number of savings or investments. However, even if you have a lot of student loans, you may still be able to control the number. Having a low net worth doesn’t happen so much because you’re in debt. Instead, it’s often because you aren’t investing correctly or are not saving enough. If you have student loans, you might not be putting much in your savings account. For example, if you had your own business, you may be able to earn more. And you might qualify for more tax deductions so you could put more of your earnings away.
One way of being able to save more is by researching deferment and forbearance on Earnest.com for your student loans. Each process allows you to put off making payments on your loans, preventing you from defaulting. But it’s essential to understand how each process might affect your debt. With deferment, your loan’s interest may or may not keep accruing, depending on the type of loan. If it doesn’t accrue, the balance won’t be affected. You have to meet requirements to quality, such as losing your full-time job or going back to school. The limit would be three years if you deferred the loan because of unemployment or other types of financial hardship. On the other hand, forbearance is for those who don’t qualify for loan deferment. You’ll have to be approved for this, and you may be limited to a year. No matter what type of loan you have, the interest will keep accruing. Your account balance may be higher once it’s time to keep making payments.
Someone’s net worth is their total assets minus any liabilities. It’s easy to calculate it since you just add up the value of what you own and subtract your debts. Think of it as the money you might have if you sold your assets and used that to pay every debt. If you have a negative net worth, it means you have more liabilities than assets. However, it’s not an uncommon scenario for those who are just getting started. If you have a negative net worth, it’s what you would still owe, even if you sold all your belongings and used all your cash. Of course, you won’t really sell all your belongings, but the number still represents something important. There isn’t a perfect number to have to achieve excellent financial health. However, it’s still helpful to know your net worth so you can determine whether or not you are making progress toward your goals. If you’re making progress, the number should gradually get larger.
It’s not that hard to calculate your net worth. The hardest part is often gathering information. That’s why it’s usually a good idea to store the data about your liabilities and assets together in a folder. Try to update it once a year or every time something changes. For example, if you purchase a home or pay off debt, consider updating your folder. Having everything together is often smart in case a family member needs this information. To calculate your worth, first, consider your liabilities. That might include debt, such as credit card balances, mortgages, or car payments. Add up every balance you owe. The result is your liabilities.
Next, you’ll figure out what your assets are. It’s often easiest to begin by considering the largest ones, such as real estate, cars, or other property. And if you own a business, that’ll also include the company. If you are a business owner, the calculation might be a bit trickier. If you don’t have an exact dollar amount, try to find an accurate market value estimate. If you have liquid assets, such as savings accounts, investments, or brokerage, and retirement accounts, look for the statements. You might also have other valuable items, such as jewelry, art, or a collection, so consider adding these as well. If it’s more than a few hundred dollars, consider including them. Add up each group of assets to get the whole figure. Now you’re ready to find your net worth.
This calculation is relatively easy. Just subtract your liabilities from your assets. This number is often a great starting point to help you make goals for the future. It’s a good idea to do this each year so you can compare the two numbers. That way, you can figure out if you are meeting your goals or falling behind. If you have specific goals and a fixed plan on how to reach them, you might want to repeat the process more than once each year.
To increase your net worth, it’s a good idea to try to reduce expenses when you can. If you don’t have one already, now is the time to create a budget. Try to shift more spending toward repaying your debts and increasing your savings. Once you have an emergency fund set up, try putting as much as you can toward retirement. For liquid assets, which don’t include your vehicle, home, or other physical items, consider keeping them in a high-paying savings account.
That way, you can watch them grow quickly, especially if you get a good percentage each year. Pay off your loans as soon as you can, and if you’re eligible to get a lower interest rate through consolidating or refinancing, look into the process. When you’re calculating the number each year, make sure you’re on the conservative side with certain estimates. That’s especially true for your car and home value. While it can look good to put down a higher value, you won’t get an accurate estimate.