You’ve probably heard of the term “net worth” before being discussed in numerous lifestyle articles and financial news outlets. However, have you ever really grasped what it means? Net worth is often regarded as something essential in our lives, but the question is, why? Are there methods when it comes to increasing it? If you’ve finally decided to dig deeper into this concept and find ways to increase your own net worth, this article is a good place to start.
What Does Net Worth Mean?
The first thing you need to understand is that net worth is fundamentally the sum of money you can call yours. When we say the sum of money, we mean both the physical and liquidated money you own. Even if you have $10,000 in your bank account, your net worth could be higher or lower than this, depending on your assets and liabilities.
Assets are properties and investments that you have that could potentially be turned into money. For example, if you own a house that costs around $200,000, your net worth would be $210,000. If you invest in a company and you own about $50,000 in shares, your net worth would rise to $260,000.
However, not everything you own adds to your net worth. There’s a possibility that some of them would be subtracted. That’s because of something called liabilities. This includes your debts, loans, and mortgage plan, if you have any. If you haven’t fully paid your student debt that amounts to $60,000 yet, then your net worth drops to $200,000. If you have other liabilities, the total cost of these would be subtracted from your assets, and the difference is what we know as net worth.
The Importance of Net Worth
The question now is why we should care about learning what net worth is? More importantly, why should we bother increasing it? To put it simply, net worth is the computation that determines whether you’re getting closer to financial freedom or not. This brings forth another question: what is financial freedom?
Being able to achieve financial freedom, or financial independence, as other people call it, means that everything in your life that involves money management is working for you. This includes having enough savings in your account and paying for your bills, mortgage, rent, food, clothing, and even vacation trips.
Financial independence is also computed by identifying the total cost of the lifestyle you want. Once you get the number you need to live that lifestyle, your net worth will show you how close or how far you are from realizing it. This means that you will also learn how to improve your money management skills to achieve your goal by knowing your net worth.
Different Ways to Increase Net Worth
Now is as good a time as any to discuss how you can increase your net worth. Keep in mind that this is a slow and steady process, and there’s probably no shortcut to increasing your net worth.
Open Up a Business
While we’ve mentioned that you can’t trick your way into improving your net worth, we didn’t mention anything about speeding up the process. One of the fastest ways to boost your net worth is to open up a business because this can significantly improve your assets and generate money into your bank account. However, you also need to consider the expenses this may incur. Knowing the startup costs for a restaurant franchise will help you prepare for this venture, and the food industry is the best business area to be involved in because it’s one of our basic necessities.
Pay Off Debt
You learned earlier that your liabilities are subtracted from your assets to calculate your net worth. This means that if you have lower liabilities, then your assets would not be significantly affected. One simple method to lower your liabilities is to pay off debt. If you can’t handle paying for it in a single transaction, then at least try to increase your monthly payments to lessen your total debt more quickly.
If you’re able to pay for everything, but you think your net worth is still not growing fast enough, one way to solve this is to reduce your expenses. You might think that you’ll just save a few hundred dollars a week, but in the long run, all of these additional savings because of reduced expenses will be good for your net worth.
Being financially stable is perhaps one of the most important aspects of your life that you need to focus on. While there are many ways to help you navigate through this, understanding what net worth will be beneficial to this pursuit.