As we strive to move up the ladder of success, one of the benchmarks that we can use to gauge our progress is our net worth. Your net worth is a measure of your financial value which is calculated by subtracting your total liabilities from the total value of your assets. In essence, it is the net value of all the things you own, less all the things you owe.
According to T Harv Eker, best-selling author of the Secrets of the Millionaire Mind, net worth is a fundamental measure of wealth. Eker reveals that persons who are determined to be rich will focus their efforts on increasing their net worth.
So if one of your money goals for this year is to build your wealth, you should be paying close attention to your net worth.
Calculating your net worth
It’s quite simple to work out the status of your net worth. First, write down the value of all your assets and belongings including balances in savings and investment accounts, vehicle, personal residence, land, household furnishings, and life insurance cash amounts. Next, list all your liabilities such as loan, credit card or mortgage balances, unpaid bills and any other outstanding obligations.
Then find the total of all your asset values and the total amount of your liabilities. The difference between these figures will be your net worth. If you have more assets than liabilities, then you have a positive net worth; if your financial obligations outweigh your possessions, then your net worth is negative.
You can download a net worth calculator at www.financiallysmart.org.
Is it a good indicator of wealth?
It is possible to have a healthy net worth figure, but still be in financial jeopardy. In fact, I have seen many people who on paper are asset-rich, but in reality are unable to meet their everyday bills. For example, you could live in a house worth J$15 million and drive a J$3 million vehicle, but not have enough cash for two months’ expenses.
The type of assets that make up your net worth is also of importance. If you own things that are relatively illiquid, which are difficult to convert into cash, then this could be a negative factor. Let’s say that you have a large plot of land in the country that boosts your net worth position. However, in the event of an emergency, it could take a long time to sell the property to get the needed funds.
Cash flow is king
Your net worth statement doesn’t track your cash flow position; and access to cash can sometimes be a better indicator of how well you are able to manage your affairs. Robert Kiyosaki, author of Rich Dad, Poor Dad, declares that an asset is anything that puts money into your pocket. Therefore, by his definition, if what you own isn’t earning money for you, then it really isn’t an asset.
I recommend that you pay more attention to the amount of cash that your possessions can create than just their value alone. Even if your current financial situation makes it challenging for you to purchase physical assets, you can still pursue income-generating opportunities that can increase the money flowing into your pockets.
Embrace your real worth
Whether you have significant assets or none at all, remember you are worth more than your net worth figure. As Og Mandino declares in The Greatest Salesman in the World, you are nature’s greatest miracle — there is no other person in the world with your unique gifts. Mandino proclaims, “I am rare, and there is value in rarity; therefore I am valuable.”
With your one-of-a-kind combination of personality, skills and ideas, you possess unlimited potential to create a future of abundant wealth. The secret to unlocking your latent abilities is to first understand your purpose in this world and then resolve to use your special value to serve others around you. Your financial net worth will increase in line with the number of people you serve.
Some assets are priceless
Don’t forget what’s truly important in life. As our 2012 Money Manifesto declares, “I will not become discontented with my financial status by focusing solely on my material desires. I will resolve to give thanks, every day, for all the possessions and non-material blessings that are currently in my life. I will remember those who are less fortunate and will share what I have with them.”
So, as you travel along the road to financial success this year, approach it with enthusiasm, optimism and determination. Don’t give up if you face discouragement and setbacks along the way. They are just character-building lessons that will help to transform you into the person you need to be, to manage the wealth you desire.
Copyright © 2012 Cherryl Hanson Simpson. No reproduction without written consent.
Originally published in The Daily Observer, February 23, 2012
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Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmart.org. Contact Cherryl