A Better Measure of Financial Health: Net Worth
Consistent growth in income or assets are indicators of positive financial health, but when liabilities grow faster than assets, or the value of assets drop, the result is negative net worth. Net worth is calculated by subtracting liabilities (owed debt) from assets owned. It is estimated for both individuals and companies and is an accurate determination of how much something (or someone) is worth. The results of this calculation can fluctuate based on assets decreasing or increasing in value, or acquiring more or paying off debt.
Before investing in a company tied to the stock market, financial analysts examine the stability of a company by evaluating the net worth of the company and other factors; profits and earnings, leadership, years in business, etc. Your retirement and investment accounts can impact if the company you’ve invested in has a decline in net worth or the stock valuation changes. This decline can directly affect your personal net worth.
People tend to compare what they have to their peers; they examine the house or the car, but net worth and financial success is something that is not always visual. Doing your net worth calculation can help determine if you are moving toward a positive net worth or not.
It’s easy to get caught up in ‘stuff’ especially if you have to finance purchases. Remember that the purchases may lose value over time as they become older. Automobiles and sometimes homes can lose value based on geography, economic conditions, and aging neighborhoods. Whether you’re trying to become a millionaire before you retire or pay off all your debt, net worth matters because it’s a good tool to measure your progress.
Discussing your net worth at your financial planning meeting can be beneficial and provide you with information to help keep you on track with your financial goals. Remember it is always an accurate indication your of financial health – for better or worse.
*Advisory services offered through Trajan Wealth, L.L.C., an SEC-registered investment adviser.
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