Once you start organizing your current
financial situation and future, one big step you take is calculating your net
worth. Your net worth is assets minus liabilities; if you sold everything, you
have right now and used the money to pay debt that would be your net worth.
Some people get the surprise of their life
after discovering they owe $15,000 more than they originally thought after they
computed for their net worth. It is important to know this to enable you to get
on the path to financial freedom.
Assets
Assets are anything that you own that has
value or you can sell to improve your cash flow. You and many others have these
assets:
- Cash on
hand and in the bank
- Home
- Furniture
- Cars
- Retirement
and brokerage accounts
- Cash value life insurance
These are not the only assets you may have,
but these have some value. The value of your assets is not what you deem it but
how much a willing buyer will pay for it. The market will dictate the price of
your home or vehicle, and the other items you have as assets.
Liabilities
Liabilities are anything that take away
from your cash flow and have a negative effect on your balance sheet. Some
sample of these are:
- Line of
credit
- Mortgage
- Long-term
loans
- Payday loans
- Credit cards
These are just a handful of the liabilities
you may have, there are others that take money away from you and lose value
over time.
Why
It Is Important to Know Your Net Worth
After calculating, your net worth may be
positive or negative.
Your net worth also helps you identify
items that you own which have resale value to help you get on the path to
financial freedom.
Just because you have a negative net worth
does not mean you will have a bleak financial future. The computation does not
consider your income earning potential. You may be thousands of dollars in the
red because you went to law school, but you have a high earning potential to
pay off the debt faster.
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