Financial health depends on many factors such as your income, tax, debt, family obligations, credit rating, and, of course, your net worth. Your net worth is a snapshot of your financial situation. It includes more than the money you have in the bank. When determining your worth, many factors are taken into account.
What is Net Worth?
Net worth can be defined as your total assets, financial and non-financial, minus all debts and loans.
Assets are everything you own, including money in your savings and chequing accounts as well as cash under the mattress. Assets are not limited to financial items. Assets include your property, furniture, and antiques as well as stocks and bonds, insurance policies, and cars. You don't normally consider items of low value like plates or pillows as part of your assets.
All your owings, including debts and financial obligations, are considered liabilities. All liabilities include your mortgage, credit card debts, student loans, business loans, and child support payments.
Where does your income stand?
Income is the sum of all the taxable income you earn from work or other financial support, such as a salary or wage, or disability earnings from the government. Income is not considered an asset, although it can contribute to your financial health. However, the money you invest and save from your income over time is part of your net wealth.
Even if your income is high, it won't guarantee your wealth. If you spend $275,000 per year on debts or purchases, a $250,000.00 yearly salary after taxes won't increase your net worth.
How do you calculate your net worth?
Simply put: Assets = Liability = Net Worth
These steps will help you calculate your net worth:
1. Collect all financial documents
Although it is easy to calculate your net worth, you will need to have access to specific documents in order to do so accurately. This includes all financial information regarding your assets and liabilities, such as savings accounts, investments, loans, and any other debts.
2. Calculate your assets
Start with your largest assets, such as your home, boat, or car. Add up the market value of each asset and calculate it.
If your home has a value of $700,000.00, your boat is worth $90,000, and your car is worth $20,000, then your biggest assets are worth $810,000.00.
Add up your liquid assets as well as your possessions such as fine jewelry.
If you have $1,500 in stocks and your savings and chequing accounts total $9,000, then the total amount is $10,500
Your assets total $820,500.00.
3. Calculate your liabilities
Add together the total value of your car loan, mortgage, credit card debt, and other debts. If you have $275,000 to pay off your mortgage, $7,000 in credit card debt, and $50,000 in student loans left, your liabilities are $332,000.
4. Calculate your net worth
Assets (820,500) - Liabilities (332,000) = $488,500.
How can I increase my net worth?
There are several ways to increase your net worth.
Get Out of Debt
Paying down your debt is a great way to increase your net worth. Your net worth is directly related to how much of your assets you have over your debts. You'll also have more money to invest in other areas and save on your debt. It is recommended to start with debt at the highest interest rates, and then work your way down.
Cut Expenses and Budget Better
You can save money by reviewing your budget and eliminating unnecessary expenses. Budgeting applications can help you track and budget. Canadians who are financially literate know how to budget and can stick to it. They can also take advantage of financial software such as the Prillionaires net worth calculator to get a more accurate estimate. Many studies show that budgeting is an important factor in reaching long-term financial goals, such as purchasing a house or having a retirement plan.
More Income Sources, Like Side Hustles or Investments That Pay Dividends
Side hustles and investments are great ways to increase your net worth. Your net worth is determined by how much income you have. The three most important factors are saving, investing, and paying down debt. There are many simple ways to make money through minor tasks like surveys and cash-back services. You might consider investing in real estate or other investments that yield dividends if you are looking for passive income.
Always be aware of your assets and liabilities
You can better plan how you will build your net worth by reviewing your assets and liabilities regularly. You could consolidate high-interest debts to make it easier to pay them off. You could also opt to invest your savings in an ETF or another investment vehicle that will return higher returns if you notice that your money isn't earning enough interest.