Your net worth is the sum of all your assets (bank accounts, investments, real estate, etc.) minus the sum of all your debts (mortgages, student loans, credit cards, etc.). This number becomes even more important when you realize its relationship with
your financial security. When you have a higher net worth, typically it gives you more freedom in making choices, whether it’s starting a business, changing to a different career, or retiring early.
While not a perfect measure of your overall financial health, your net worth provides three very important pieces of information.
- It shows where you stand financially at a moment in time.
- It conveys your potential for financial security in the future.
- It gives you a number to measure your progress for your overall financial health
At different life stages, your net worth will change. It may be lower when you have just graduated from college (due to student loans) but it can increase as you start working and saving more. Remember, your net worth isn’t a static number.
It evolves over time based on your situation and life choices.
If you find yourself with a low (or perhaps even negative) net worth, that could be a sign that your financial situation is less than optimal. However, if your net worth is increasing over time, that can show that your situation is improving and you are
moving in the right direction. But to find out, you must first track it.