People what is your fortune
Net worth - the only relevant metric for you
Every few months, when my fingers itch, I grab my net worth Excel spreadsheet and update it with the latest developments over the past few weeks. This was also the case this weekend when I documented my additional income. All the numbers that I enter there serve only one purpose: To determine my net worth. You will now find out why I do this and why an income target is too short-sighted in my eyes.
What is "net worth" and how do I calculate it?
The net worth is the difference between your liabilities, i.e. debts, and your assets, i.e. things of value. A student loan or unpaid bills are on the liabilities side, while real estate, stocks, paintings, companies, gold, money, etc. belong on the assets side. The difference between the two sides is your net worth.
Example of net worth:
In this example, the person has assets valued at $ 165,000 and liabilities valued at $ 15,000. The difference, the net worth, is 150,000 euros.
As you can see in the table, there are assets that are risk-free (cash, insurance, etc.) and those that are risky (real estate, companies, etc.). Such an overview can of course only be a snapshot. Nobody can know what your property will be worth in 20 years' time, or whether the company in which you are involved still exists. To evaluate these assets, you therefore use the current status, e.g. the current sales value of your property (just check the prices of similar properties on ImmoScout).
By the way: Statistically speaking, every household in Germany has net assets of more than 200,000 euros (source: Manager Magazin). However, these numbers should be used with caution as some very wealthy people are pulling this average upwards. The Deutsche Bundesbank found out through a survey that almost three quarters of private households in 2014 had net wealth that was below the average. The mean value is 60,400 euros in net assets.
You can find an Excel template for your asset check here.
Why is net worth so important?
Everything comes together when it comes to net worth; it is the basis of any financial planning. What do I actually have? Where am i? And above all: where do I want to go?
Many people calculate their financial success based on their salary. But that is not very meaningful and therefore not a good indicator for your personal finances. Because even people with a comparatively high salary can be holistically in the red. Someone who earns $ 100,000 can be heavily in debt and have negative net worth. It doesn't matter how much money you earn, but how much you keep - and invest cleverly so that it becomes more.
Salary or other income is primarily cash. But what about the cash? And: What will happen to me if I don't have the cash? What other values do I have that can bring me money? With a positive net worth, one can generate income. Through rent, through the sale of company shares, through returns from equity investments. You have options. With negative net worth, whenever the debts are greater than the assets, you have very few options. Positive net worth is the basis of any financial security.
Someone with a high salary does not necessarily have financial security. Someone with a high net worth does.
Objective: to increase net wealth
Your current net worth is a great way to set financial goals. Such a goal could be: Increase my net worth by 20 percent in 2017. Income naturally plays a major role in this construct. Therefore, I have set very clear goals for additional income for the next few years. But for me this income is only a means to an end. I generate income to reallocate this money: into my companies, ETFs or other assets so that these systems get more out of the money and my net worth grows steadily. Income is the fodder for my assets page.
What I like about a net worth goal are two things:
1. It broadens the horizon of thought
When you focus on increasing your net worth, you have more leverage for growth. Earning more money is only one of several possibilities and only an intermediate goal for the big picture. In order to increase your net worth by 20,000 euros, you don't necessarily have to earn 20,000 euros. You could also pay off $ 10,000 of your debt and save $ 5,000 more and earn $ 5,000. You automatically come into a holistic mindset and look at all of your assets instead of just your income.
2. It is sustainable (more)
If your goal is: “To earn 20,000 euros more in Q4 2017”, I think that's too short-sighted. What happens to the additional 20,000 euros? If you buy yourself a new car from it, you won't have gained much at first. If, on the other hand, your goal is: “Increase my net worth by 20,000 euros in Q4 2017”, that is a sustainable target formulation, because it already includes an increase in your assets. Earning 20,000 euros and buying a car for 20,000 euros is not part of this objective because this purchase does not help you achieve your goals. On the contrary: it would take you further away from it.
How do I increase my net worth?
Here are a few ways to increase your overall wealth:
- build a new asset: e.g. your own business
- participate in a company (e.g. start-up)
- Debt reduction
- Demand more salary / develop additional sources of income
- save more and invest the money saved
- Shift money from “risk-free” to “risky” so that it increases
The net worth metric is so important because it relates to all of your assets rather than just your earnings. Income has no meaning whatsoever about your financial situation. A high salary does not mean that you have financial security. My recommendation to you: Take a few hours and calculate your own net worth. So you have in black and white how wealthy you are. Not wealthy enough yet? Then set a specific net worth goal for yourself and get creative about how to achieve it. Try to get in the habit of thinking in terms of net worth, not cash.
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