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What Is My Net Worth?

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Contributor:
Sorted.org.nz
Sorted.org.nz

Your
net worth is the difference between the value of what you own and the
total amount that you owe. It's the amount of cash you'd have in your
back pocket if you sold everything and paid off all your debts today.

It's another way of saying how wealthy you are.

Knowing your net worth is important as a first step in setting your financial goals, and building your financial plan.

Overall, your financial goal should be to increase your net worth over time.

Calculate your net worth every year

Calculate your net worth now - write down the value of what you own
and subtract the amount you owe. The difference is your net worth.
Write down the goal for your net worth in 12 months time. Think about
where the growth is likely to come from (for example, $3,000 from
savings from your pay, $400 from growth in investments, $2,000 from an
expected tax refund). Over a few years you could graph the changes to
your net worth.

Net worth is really important when you're thinking about retirement.
In retirement, most people want to be debt free, have a house, and have
some money to live on.

The composition of your net worth (that is, how it's made up) is
important too - it's the balance between your assets that provide a
cash income such as an investment fund, and your non-cash producing
assets such as your house.

Calculate your current net worth. It'll help you set your goals. And review your position, say, once every year. You'll need to ask yourself two things:

Is my net worth increasing overall?

Is the composition of my net worth about right? (That is, do you have the right balance of cash and non-cash assets?)

The composition of your net worth

This is the balance between your cash producing and non-cash
producing assets. As you approach the end of your working life, you
need to replace the income from your job with income from investments.
You should alter the composition of your net worth to include more cash
producing investments - for instance, selling a house to invest and
live off the capital.

 

Content provided by Sorted.org.nz, Your Independent Money Guide.

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