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When you think about net value, you can automatically imagine celebrities and tech moguls and their million dollar lifestyles by default. But everyone should take some time to understand their net worth and how it relates to their daily financial decisions.
Net worth is a basic principle of personal finance that everyone from recent graduates to working families and even retirees can benefit from understanding. But, at the same time, it’s crucial to take this number with a grain of salt.
The average American has $ 90,460 in debt, but the average net worth is $ 748,800. However, because better-off households skew the averages, economists agree that a better indicator of US household net worth is the median, which is $ 121,700.
Net worth is different from income. Calculate equity by taking the total value of your assets (cash, property, etc.) and subtracting your liabilities (i.e. outstanding debt balances).
How to calculate net worth
Net worth = assets – liabilities
mint financial planner Brittney Castro, CFP warns that many people view net worth as an arbitrary judgment of how much money they should have at a certain age or a signal of someone’s wealth – but in reality, net worth is very nuanced.
Too often, we confuse our net worth with our personal worth, argues Castro. But really, “it’s important that people look at it like a newsletter,” she says.
Each individual must decide for himself how much money he needs to save in order to live and / or retire comfortably. But, at the same time, our life circumstances can change – and sometimes dramatically – so it’s best to think of net worth in terms of a momentary snapshot that tells us how close we are to our goals. Then you can get rid of it while you get down to the daily work of budgeting, economy and consciously spend.
Of course, looking your net worth in the face can be intimidating, especially if you have student loans, a mortgage or other debts that occupy an important place in relation to your assets and your cash in the bank. But it can also give you some clarity.
“It helps people think more with an entrepreneurial mindset,” Castro says. When you know where you stand, then you’ll be more inclined to consider ways to create better cash flow or add new sources of income.
“It’s the rich mentality,” says Castro. “A lot of wealthy people follow the strategy of not taking on more responsibility unless it is tied to an asset or creates more assets.”
So how does the common person begin to embody this “rich mindset” and increase their net worth? Ahead, Castro shares some of his best advice with To select.
While many people are reluctant to take on debt, the rich borrow with long-term net worth growth in mind.
“If you want to take out another mortgage or other liability, what can you do to create income from that asset to cover it?” Castro asks.
An example is a couple from the Bay area who at the time of their marriage had six-figure student debt and two mortgages. Although their student loans alone exceed $ 150,000, they borrowed with the plan that they would aggressively pay off once they found a job. They were able to make payments of $ 4,000 per month on the loans and still have enough surplus to cover their living expenses.
While the couple also had two mortgages, they earned passive income by converting a house into a rental property. Rent from tenants covered the full cost of the mortgage, allowing landlords to build equity in a long-lived asset that will grow in value.
The couple had considerable debt, but they also knew that debt was necessary to increase their net worth in the long run. They had no trouble paying off high interest credit card debt, which never offered any return on investment.
Knowing your net worth can also help you set savings goals.
“You might be thinking, ‘If I saved an extra $ 100 per month, I could increase my savings by $ 1,200 for the year,” says Castro, giving an example of a simple starting point.
Eventually, you’ll begin to look for additional opportunities to earn an additional $ 150, $ 250, or even $ 500 per month as you gain a better understanding of how these short-term wins contribute to your financial well-being throughout your life.
No matter how often you check your net worth, don’t over-identify yourself, advises Castro. Ultimately, money comes and goes, and many factors are ultimately beyond our control.
“Some people could have a million dollar net worth and then get divorced and half is gone,” she tells Select. “Don’t get so connected to your network that you start to get attached to these comparisons of self-esteem.”
Instead, think of net worth as a tool, much like a barometer. “Even if it’s negative, just say, ‘Okay, what can I do to improve it? “Really, that’s the idea,” Castro says. “Then look for some simple steps to improve it, even just reducing your spending by $ 50 a month” can add up over time.
Net worth fluctuates, and that’s normal. Budgeting and expense tracking apps can help you monitor your net worth over time (without obsessing). Many apps give you the ability to link all of your accounts, including verification, savings, money markets, CD and retirement accounts, as well as your liabilities such as credit card balances and student loans.
Personal capital acts as an investment tool besides being a budgeting app, making it easy for you to see a big picture of all your personal finances in one place. Meanwhile, mint is a good choice when you want to set and meet specific goals such as saving for an emergency fund and paying down debt.
For a full budget update, see You need a budget (YNAB), which uses a zero-sum budgeting system that gives every dollar a purpose.
Budgeting, like net worth, may seem like an alien concept, but over time it becomes as familiar as other everyday habits like taking out the trash, doing the dishes and making the bed – and you will benefit from it for many years to come. . .
Editorial note: The opinions, analyzes, criticisms or recommendations expressed in this article are those of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.