Understanding Net Worth | Many people think that having so many properties gives value to their name but in reality, what counts is one's net worth.
The bottom value is the single most important value that one should look at and not the value of the assets one has accumulated.
You may have four Jaguars parked at your mansion but all those are nothing if you have no net worth.
Understanding Net Worth
With that let's focus on Net Worth.
It is defined as:
“The amount by which a company or individual's assets exceed their liabilities. ”
In accounting it is explained by re-arranging the Balance Sheet equation:
Capital (Net Worth) = Asset – Liability
Where: Asset = things you or your business own
Liability = things you or your business owe to someone else
With this Net Worth simply means your actual value.
This is important because as one compares a company to another one has to look where the company stands. A company that has a positive net worth simply means it is well funded thus it can fund its current operation without fear of default in paying suppliers.
A negative net worth commonly known as the deficit on the other hand means that a company is out of enough assets to settle its obligations.
There is a fear that operations may stop and creditors may run after the company's assets to satisfy obligations. It also means that the company is more of a type that is owned by its creditors rather than its owners.
Looking back at my last post about how much is money one has one must think of it as your net worth. I am currently reading “The Millionaire Next Door” which was a survey made into a book by Thomas Stanley & William Danko.
It is a survey to find out what are the common factors among America's millionaires. One topic was about one's net worth.
The expected net worth formula from “The Millionaire Next Door” is like this:
Age X Gross Annual Income/10
I was shocked when I computed my expected net worth. My computations resulted in about $ 85,000.00 based on my salary and age but to date, I only have twenty-something thousand in my name yikes.
You might ask me why age becomes a factor in this equation. Age is an important factor because as time passes one should have accumulated that amount of money if you have a fixed amount of income like your salary.
It means not only saving money but also earning from that savings. As Bob Proctor said, “Money is not meant to be hoarded, it should be circulated.”
If you put your money in your bamboo alcansya (Pinoy style piggy bank) that amount you expect to have when that piggy bank is full is the amount you have dropped on it.
Probably it is wise to save but there is also a wiser way to make use of that money. If you are familiar with the parable of the talents you will know why keeping money is wrong.
Likewise, you must differentiate spending from circulating money; there's a thousand-kilometer difference between this two. When you spend you let go of the money.
When you circulate it means it comes back to you with additional money. Grow money; that is what it means to circulate money.
Putting it in a bank for 2-3% interest is not that bad, if you have a business plan that you think you can manage well probably putting your money there will be better.
Investing on the other hand is for the long term thus you need to know your net worth.
By knowing your net worth you will be able to decide how much do you really have and how much of that you can freely put in a long-term investment.
If you have time and if you want to know your expected net worth try the equation above, it will make you think about where have spent all that money that you have earned from your job these past years.