Challenge

Day 1: Net Worth (30-Day Financial Wellness Challenge)

The most important number of your financial vitals is your net worth.

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Day 1 - 30 Day Financial Wellness ChallengeWelcome to Day 1 of the 30-Day Financial Wellness Challenge.

Each day will comprise of financial exercises, some short and others a bit longer, to help you become financially fit. The goal is to tackle different aspects of personal finances one day at a time. After the 30 days, you’ll have a stronger understanding of your financial health and an action plan to improve your financial wellbeing.

On Day 1, we’re going to tackle Net Worth.

Net Worth and Wealth

We cannot talk about net worth without discussing wealth. In its most basic definition, wealth is the abundance of cash, resources and other valuable financial assets or physical possessions that can be converted into cash.

However, wealth means something different to different people. Some may view wealth in terms of possession while others in meaningful connections.

Wealth inspires confidence, fosters security, and supports peace of mind. No wonder why so many of us want to be wealthy.

I want you to think about the following questions.

What does wealth mean to you? Do you feel wealthy? What do you need to be wealthy? Are you confident about your financial situation?

Take the time to ponder them. And write down your answers.

There is no right or wrong answer.

Since defining wealth can be as subjective as answering, “what does happiness mean to you?” We want to reframe wealth as it pertains to your financial health.

Financial wealth is measured by what you have of monetary value. It can be the value of your possession such as your home, savings accounts, investment portfolio, art collection, or stash of gold in a safe deposit box.

My net worth story

For a long time, I thought wealth meant having a high income and an ability to spend freely. I focused my attention on climbing the corporate ladder and increasing my salary. However, as my income increased I was experiencing lifestyle inflation too.

The more money I made, the more I spent. I lived way above my means, lived paycheck to paycheck and continued to purchase items that had no long-term monetary value. I wasn’t building assets.

Eventually, I learned wealth wasn’t the ability to spend but the ability to save. I am not wealthy because I can spend, but rather, I have and can save money. That meant my income covers my living expenses and discretionary spending while having money left to save and invest.

What’s Your Net Worth

The most important number of your financial vitals is your net worth. Net worth is the most accurate measure of your wealth and is the best indicator of financial health at a given point in time.

Net worth helps you track your various financial activities to achieve financial wellness. You’re able to see the impact of increasing income, growing savings, investing, and building assets. Conversely, you can see how managing credit as leverage and paying off debt can impact your wealth.

Your net worth is the difference between what you own (assets) and what you owe (liabilities).

Net worth is easily understood with the formula below:

Net worth = What you own (assets) – What you owe (liabilities)

Assets are things of value and can be converted into cash such as savings accounts, real estate, investment accounts and other personal property (cars, computers, collectibles).

Liabilities are your debt obligations such as auto loans, credit cards, mortgages, student loans, medical bills and any other installment payment you’re making.

What calculating your net worth reveals?

If your net worth is positive, it means you have enough assets to cover your liabilities. This means financial security and peace of mind. On the contrary, a negative net worth means you do not have enough assets (savings, investments, or items of value) to cover your liabilities. Negative net worth can increase the likelihood of future financial stress.

Day 1 Assignment

Let’s calculate your net worth.

  1. List your assets
  2. List your liabilities
  3. Subtract your liabilities to your assets

*Print out this blog post to help you.

Today’s Date: ________Date (3 months from now)
Assets
   Home$$
   Car$$
   Savings$$
   401(k)$$
   Investments
Total Assets$$
 
Liabilities
   Mortgage$$
   Car$$
   Student Loans$$
   Credit Card Debt
$$
Total Liabilities$$
 
Net Worth$$

Net Worth Tips

  • Calculate your net worth today.
  • Then, track net worth 3 months later.
  • Eventually, track your net worth on January 1, April 1, July 1, and October 1.
  • Quarterly overviews will help you see how you’re progressing.
   Assets$
– Liabilities$
= Net Worth$

Knowing your net worth will help you address key areas of your finances.

Why is net worth important?

  • The most accurate way to measure financial health. It focuses on what you actually own rather than the perceived value of ownership when you still have debt tied to an asset.
  • Focus on wealth building, not income. Most view financial health based on higher incomes but as income grows your wealth may remain flat.
  • Reduces the stress of financial debt. Having debt can be worrisome, but when set against your assets, debt is placed into the proper financial perspective.

If you have $100,000 in total assets and owe $75,000 in total liabilities, your net worth is $25,000. In this example, you have a positive net worth meaning your assets exceed your liabilities. This is an indication of good financial health.

Let’s review another example to further see how net worth can help you focus your efforts on areas that can have the most positive impact on your wealth.

January 2015January 2016
Assets
   Home$150,000$150,000
   Car$25,000$24,000
   Savings$10,000$13,000
   401(k)$8,000$14,000
Total Assets$193,000$201,000
 
Liabilities
   Mortgage$145,000$144,000
   Car$23,000$19,500
   Student Loans$44,000$43,500
   Credit Card Debt$5,000$3,500
Total Liabilities$217,000$210,500
 
Net Worth-$24,000-$9,500

In the example above, we decided to increase our savings amount and 401(k) contribution and decided to pay more towards the car note and credit card debt, which caused a positive net worth change. Although the net worth remains negative, the progress is on the right track to building wealth.

When tracking net worth, you see where to focus your efforts. It may mean reallocating your income towards more savings, investing in different asset classes, and debt repayment.

Further Reading:

Downloads: 

Resources:

  • Personal Capital is a free personal finance app with a 360-degree view of your money. With Personal Capital, you can see all your accounts in one place with planning and analysis tools.

Next Daily Challenge: Day 2 – Your Income Number

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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