Being rich and wealthy can be measured in many ways. You can be rich in happiness, rich in love, or rich in money. When it comes to Money Monday, we focus on money and wealth. Some people look like they’re loaded with money because they have a big house, a really nice car, and are often out eating at nice restaurants. Sure, this can make someone look wealthy, and maybe they are.
Unfortunately, most of the time these people believe they are well off because they can afford to pay a hefty mortgage, car loans, and expensive dinner tabs, all while sitting on a mountain of debt. They may look rich, but they really just make a lot of money. And just because you make a lot of money, it doesn’t mean you’re rich and wealthy.
As a matter of fact, the best way to measure true wealth is pretty simple. We only have to come up with one number. No, it’s not how much money you have in your checking account. It’s what the truly rich people measure their financial success by…Net Worth.
What is Net Worth?
Net worth is pretty simple really. It’s a simple math equation where you add up all the assets that you own and then subtract from that the total amount of all of your liabilities. We’ve talked about assets and liabilities many times before. If you want a little refresher, check out my post on Assets vs. Liabilities.
Here is a quick example of a net worth calculation. Imagine you have the following assets:
1. Checking Account Balance: $2,000
2. Savings Account Balance: $8,000
3. Stock Portfolio Value: $20,000
Total Assets Value: $30,000
Now imagine you have the following liabilities:
1. Student Loan Debt: $16,000
2. Car Loan: $9,000
3. Credit Card Debt: $3,000
Total of Liabilities: $28,000
If you subtract the liabilities from your debt, you get your net worth. In this example, your net worth would be $2,000 ($30,000 – $28,000). Of course, the calculations can get a little bit tougher when you begin to figure out the value of what you have. For example, you may see your car as an asset, but if it only costs you money, it’s really a liability. Or perhaps your car’s market value is $10,000, but you only owe $9,000, then technically it is an asset worth $1,000 if you could sell it at market value.
Net Worth is the only true way to measure how wealthy a person financially is. Just because someone has a big fancy house, the newest sports car, and the finest clothes doesn’t mean they’re wealthy. At the end of the day it all comes down to assets versus liabilities and the difference between the two.
If you want to measure your financial wealth and your progress towards your financial goals, the Net Worth calculation is the one true number that doesn’t lie. Having $100,000 in an account can’t make you feel too secure if you have $1,000,000 of debt. Track your financial security and progress using the Net Worth calculation regularly and ensure you’re sticking to your financial goals.