Net Worth | Definition

Your net worth is calculated by accumulating all of your assets (what you own) and reducing all your liabilities (what you owe).

Many of us read the Forbes list every year, seeing people like Rihanna's net worth listed at $1.7 billion or Dwayne “The Rock” Johnson's net worth listed at $800 million. More recently, Forbes reported that Tesla founder Elon Musk, the wealthiest man in the world, has an astonishing $256 billion net worth. 

It’s important to know your net worth and how you can increase it. Keep reading to learn more about how to increase your net worth, 

What is Net Worth?

Net worth is defined as the total wealth of an individual, company, or household, taking into account all financial assets and liabilities. Based on your total assets and liabilities combined, your net worth can either be positive or negative. Having a positive net worth means that your assets exceed your liabilities. Conversely, a negative net worth would imply that your liabilities exceed your assets, most likely leaving you in debt.

The goal is to ensure that your net worth is positive and increasing over time. A positive net worth indicates that your financial health is in good condition. Conversely, if your net worth is decreasing, it may prompt concern that your financial health is in jeopardy, and continuing down this path could have severe financial repercussions.

How to Calculate Net Worth 

Your net worth is calculated by accumulating all of your assets (what you own) and reducing all your liabilities (what you owe). Your assets include your home equity, your car (if it’s fully paid off), the money in your checking and savings accounts, and other items of high value. On the other side of the spectrum, your liabilities include your mortgage, auto loan, and any other items that must be paid off periodically.

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Calculating net worth is easy, and it also gives you an idea of what your financial position looks like. 

By knowing your net worth, you can determine your next plan of action to better your financial situation, which can be done by growing your assets or reducing your liabilities.

How to Grow Your Net Worth

There are many different ways to grow your net worth, whether by that be through increasing your assets or reducing your liabilities. Below are some of the most common ways to help increase your net worth. 

Invest in the Stock Market

One major way high-worth celebrities such as Jay-Z can amass a large sum of wealth is through their investments in the stock market. Although your returns may not be on the same level as Jay-Z’s, investing in the stock market helps grow the value of your money.

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On average, the S&P 500 has had a 10.5% annual return since 1957. For example, if $100 were invested into an ETF that tracked the S&P 500, you would make $110.50 in the first year. As time goes on, this value would increase through continued investments and compound interest. 

Recommended Read: Industries to Consider For Long-Term Investments
 

Also, if you wish to begin saving for retirement, you can open a retirement account. Within the retirement account, you can begin depositing and investing any disposable income, so you have money left over for when you choose to retire.

Invest in Real Estate

You can buy and sell homes for profit, and this investment method is one that more seasoned individuals use to increase their net worth faster. However, although this investment opportunity allows you to increase your net worth at a faster rate, it could also result in your assets decreasing in value if done poorly.

Furthermore, higher liabilities negatively affect your net worth as your assets have to be used to pay these outstanding debts. 

Pay Down Debt

One of the most significant issues why your net worth may be lower than you want it to be is the high outstanding debt that needs to be paid off. This debt could come in different forms: an auto loan, credit card debt, or student loan.

Regardless of the debt’s origin, the outstanding amount affects your net worth and will only worsen if you do not get ahead. In addition, the longer it takes to pay off, the more interest you will have to pay, meaning your net worth will decline exponentially, depending on how long it takes to eliminate these debts.

If you see that you are struggling with making the monthly payments due to the high amounts, then a possible option may be to reach out to the borrower and request a rearrangement of the debt. By rearranging the debt, you can ensure that the monthly payments become lower to the point where you can pay them on time without experiencing any late penalties; but this may mean that it will take longer to pay off. 

Track Monthly Income and Expenses

Those with high net worths can maintain their status by ensuring their monthly net income is positive, meaning their assets are increasing. As a result, to help your financial situation, create a balance sheet that tracks your transactions.

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Recommended Read: How To Become Financially Savvy

Tracking your transactions lets you understand how much of your money you spend. When you do not track your transactions, it becomes difficult to determine how much is spent, and carelessness could have significant repercussions down the road. 

The Money Wrap-Up

As you make more money, your net worth will gradually increase. So it's important to establish key financial habits before your income rises. If you fail to establish mental fortitude, you will begin spending money excessively, and your net worth will decline. 

As a result, becoming more financially aware and establishing key habits early on increases the likelihood that your net worth will increase.

Disclaimer: The information in this article should not be considered financial advice. Always do your own research prior to investing. CapWay is not liable for any losses which may be incurred.