Whether you are trying to put together a family budget or simply want to take control of your financial situation, knowing your net worth gives you a huge advantage. What is your net worth? It is simply the value of all your assets minus the value of all to your debts and liabilities. In other words, it represents a snapshot of your financial health at a certain point in time. Your net worth is important because before you can put together a budget targeted towards achieving certain goals, you have to first know where you stand financially at the current time.
Your net worth is a number, and it is either plus or minus. A positive net worth indicates that, at least for the moment, your financial health is ok. How ok depends on how much above zero, relative to your ongoing expenses, it is. A negative condition is a bad sign. Depending on how negative your net worth is, it could mean that you are deep in debt and near bankruptcy, or simply going through a difficult financial patch which will soon be over.
In a way, knowing your financial health is almost as important as knowing your physical health. The status of both determines your quality of life.
Your net worth is represented by a Net Worth Statement. Most families never bother to create one. But having one on hand at any given time is a good way to monitor your financial situation over the months and years. It is one of the most effective financial early warning systems that you can have.
Monitoring your net worth on a monthly basis can quickly make you aware of unreasonable balances on your credit cards, diminishing value of your 401k account, vanishing assets, and so forth while there is still time to do something about it without having taking drastic financial steps. Tracking net worth could have potentially prevented many people from having to file for bankruptcy as they would have known far ahead of time that they were in financial trouble.
Compared to the past, computing your net worth today is relatively simple. If you search the Internet, you will find many online net worth calculators. But you can find many downloadable spreadsheets as well, which is handy if you want to keep your financial data away from prying eyes
In addition, however, your Net Worth Statement can keep you from making huge financial mis-steps. For instance, quite a few people will buy a new car with a minimum amount of thought, as long as they feel they can make the monthly payments and afford the insurance.
Filling in the data on your Net Worth Statement however, may reveal to you in the starkest way that, if you purchase the automobile, yes you can afford to make the monthly payments. But, if you do so, you will put a huge hole in your net worth which may take years to replace. And based on that, you may decide to not buy that new car.
The point is simple. If you did not have the Net Worth Statement as your compass, you may have made a significant financial decision based on your gut. You would have felt that you could afford it, not taking into account the effect that it would have on your financial situation as a whole. And that is the real benefit that tracking your net worth on a regular basis will bring to you.
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