So you’ve got some goals…great! If your financial journey is a race, your next step is to find your financial starting line. Knowing where you are starting from is the only real way to know how far you have to go to achieve the goals that you’ve set.
So how does this work?
We start by take a look at what you own. What money do you have in savings? Retirement? Physical assets (home, cars, land, collectibles)? 1 Sorry; no, I don’t think that beanie baby you have in your closet is the one worth $50k
Second, take a look at what you owe. Credit card debt? A mortgage? Car loan? School loan? That money you borrowed from Grandma and were hoping she might have forgotten about? Write it all down and add it up. That is what you owe today. For debts, also be sure to take note of the interest rate (we’ll get to that part when we talk about consumer debt).
So if you take what you owe and subtract it from what you own, the resulting figure is know as your “net worth.” This term (thankfully) has nothing whatsoever to do with your value as a person. Rather, this is a simple measure of how much you own (your assets) vs. how much you owe (your liabilities). It is very common early in your career to start out with more in the latter category than the former (e.g. student debt). If this is your situation, the good news is that you have a lifetime of earning potential to change that. If you find yourself approaching retirement age with a little or no net savings, that is more challenging but with the right steps you can still improve your situation.
At the end of the day, net worth takes an honest assessment of where you stand financially. It is not an end in itself, but can give you an understanding of the resources at your disposal for achieving what you have identified as your personal goals and an honest assessment of where you stand financially.