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Know Your Net Worth

10/5/2013 11:08:39 PM

We’ve seen it many times, especially in the sports world and entertainment industry. Stars become famous and amass substantial wealth in short order. They live lavish lifestyles, complete with palatial estates, luxury cars, private jets, and yachts. Their stories are seen on reality shows about the rich and famous. Everything seems to be going their way. And, we are ENVIOUS!


Then, one day we’re shocked to learn that the star that once had it all just declared bankruptcy! How on earth could this happen?


Whether it’s a famous star or a “wealthy” family in an exclusive neighborhood, it’s surprisingly common for the apparently rich to be in tough financial straits. You wouldn’t know it by their outward appearance, but people with substantial assets can be just as likely to head into financial ruin as those with more modest assets and income. It all has to do with whether their assets (what they own) exceed their liabilities or debts (what they owe). This difference is called “net worth.” If it’s positive and growing they’re in good shape. If it’s negative, they’re an accident waiting to happen.


Do you know YOUR net worth … and why it matters?


Simply stated, people who run into serious financial difficulty have negative and deteriorating net worth. It’s usually the result of living a lifestyle too extravagant for the income they earn or from financing expensive purchases. For example, if someone buys an expensive home and finances virtually all of it with debt, they’re no better off, in terms of net worth, than one who purchased a modest home with a modest down payment. It may not seem that way to the casual observer, but it’s a fact.


Most people get into financial trouble when they try to “keep up with the Joneses.” Their neighbors build a fancier home or purchase a new luxury car, and it’s tempting to follow suit. Suddenly, their debt levels soar even though their income remains the same.


You should calculate your net worth at least annually. To do this, simply compare the value of your assets (financial and property) with your liabilities (debts including loans and credit card balances). The difference should be positive and rising throughout your lifetime.


If your net worth is either negative or deteriorating, determine the cause and adjust your lifestyle and spending to get back on track. Most of the time, negative net worth situations occur when people spend too much on their home or car (usually requiring debt) or take on too much credit card debt relative to what their income can support. That’s why it’s essential to carefully evaluate what you can afford before making significant purchases.


Be sure you fully understand the difference between assets and worth. Too many people feel wealthy when they own a lot of things, but if they’re purchased on credit or with debt, it’s a myth. Do you have the self-discipline necessary to maintain a lifestyle that your income can support? Remember, if you don’t—like those ill-fated celebrities that had it all and then lost it—the consequences can be catastrophic. 


Have you learned to live within your means and been able to see a rising net-worth over your lifetime?  If you are just starting out, how do you plan to accomplish this? Share your ideas and questions with us; we’d love to hear from you!


Tagged as: finances, financial literacy, net worth, debt, wealth

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