Your finances are the sum of your income, expenses, and debt. It’s important to keep track of each of these so you have a sense of where you stand.
The first step is the check your financial status is to check your net worth.
How to calculate your net worth?
Net worth is simply the difference between your assets and liabilities.
Assets are what you own (what’s in your bank account, your home, car, and other property) minus any debts on those possessions (such as money owed on a car loan or mortgage).
Liabilities are what you owe (like credit card debt or student loans) minus any payments you’ve made toward them.
Positive net worth means that your assets are greater than your liabilities. Negative net worth means that your liabilities are greater than your assets.
Why is this important?
While we don’t recommend using your net worth as a measure of success, it can give you insight into your overall financial health.
Think of it like checking your weight on the scale each month – not only will it help keep you on track but it can also serve as a good indicator of progress or alert you to potential problems.
Also, the net worth is an important tool when you’re making major financial decisions, like whether to buy or rent a home or take out college loans or borrow money for business purposes. In those cases, it can help you figure out how much risk you should take on given your financial health, how much money you can afford to borrow, and so on.
How often should I check my Net Worth?
So, when should you check in on where you stand?
Well, here’s a simple rule:
If you’re under 35, check-in once a year.
If you’re over 35, check-in twice a year.
That gives you enough data points to see what’s really happening with your finances without getting stuck in analysis paralysis.
What is a Net Worth Statement?
Your net worth statement is a snapshot of your financial health. It lists all of your assets (things that have value) and all of your liabilities (debts or things that you owe), to help you understand how strong your financial position is at any given moment.
After calculating your net worth and checking your current financial situation, it’s time to assess whether you are in a good financial situation or a bad one. These are just some good insights and not rules
You can say you are in a good financial situation if
You can handle an unexpected expense.
You’re not using credit cards too much.
You’re saving for retirement.
Your debts are shrinking, not growing
You pay your bills on time.
You live within your means.
You plan for emergencies.
You have more money coming in than going out.
You’re not too focused on money.
You can cover an unexpected expense.
You’re actively saving for retirement.
You can afford luxuries without breaking the bank.
You don’t live paycheck to paycheck.
You have a comfortable, but not crazy, amount of debt.
You can easily pay your bills, credit card obligations, and other debts each month.
You have a budget, and you stick to it.
You’ve met or exceeded your savings goals over the last year.
You’re not spending more than you earn.
Your credit score is pretty good.
You know exactly where your money goes
If you didn’t work for a month, you wouldn’t be broke at the end of it
You have at least six months of savings in a readily accessible account.
You’re paying off high-interest debt.
Your insurance coverage is enough.
Your emergency fund is growing.