My thoughts on Net Worth

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Net worth is a measurement, a simple calculation: assets minus liabilities.  An asset is any object of value while a liability is any form of debt.  People track their net worth to ensure they are building their wealth over the months and years.  They do this by creating simple net worth statements.

Net Worth Statement Example

Assets House $200,000
Vehicles $20,000
Jewellery $1,500
Liabilities Mortgage -$143,000
Line of Credit -$2,600
Net Worth $75,900

 

Negative Net Worth

A net worth of $75900 is a great start!  Our example person has managed to get their finances to a point where their net worth is actually positive. If a persons net worth is negative, their number one priority should be to pay off their debt in my opinion.  They should also start with the highest interest rate loans first.  There are options to consolidate multiple high interest debts into a single lower interest payment, an example of this would be to use a line of credit to pay off higher interest credit cards. This method is very popular and really is a good decision in the long run to get out of credit card debt but be cautious.  Taking this route can be dangerous because your bringing in a new debt product (the line of credit) to bring the credit cards to zero.  Be sure to only allow your line of credit limit to be whats needed to pay off the cards.  There may be a minimum limit on some lines of credit in which case keep it as low as possible.  There also may be a fee to open the line of credit, this is often the case with secured lines of credit.  Now don’t forget about those cards either, here comes the hard part:

Spending less than you make

That means to undo the debt you have and to prevent more debt from piling up, you must spend less.  Keep spending less until your no longer holding any balance on the credit cards and you can make payments on the PRINCIPAL of your new line of credit debt.  That means more than just the interest.  Stay encouraged through the process and know it’s never too late to begin turning things in the opposite direction to begin building wealth instead of building debt.

Positive Net Worth

If a person has a positive net worth than their priority should be using their money to make more money. Personally I prefer to do this through the stock market. It is what I’m comfortable with and what works for me, others prefer land or income properties to build their net worth quickly.  Whichever way a person chooses, they should still make the choice to invest.  Holding too much cash isn’t much protection against inflation, that capital should be collecting some form of interest higher than a savings account or under your mattress.

Inflation

I found online that the 2016 inflation rate in Canada was 1.7%.  This means an item that cost $1000 in January 2016 would now cost $1017 January 2017.  So by holding cash, a person is losing future purchasing power.  Purchasing power is the value of cash expressed in terms of the amount of goods or services that one dollar can buy.  Therefore to maintain current buying power and still make a profit, a good goal at first is to earn earn 3% return annually on an investment.  Of course 3% would be very low risk investments but thats not a bad place to start is all I’m saying.  If you want to trade stocks and shoot for 10%+ then by all means learn all you can and start early.  The earlier a person starts to invest, the sooner that the power of compound interest can work FOR them.

Compound Interest

Compound interest is the concept of using interest gained on an investment to reinvest and accumulate even more interest.  It doesn’t just apply to interest, the same concept works for capital gains, dividends etc.  The whole point is don’t spend your nest egg as its growing, let it do the work until its matured and your financially free.  I’ll use a dividend stock as an example, if I invested $1000 today in a company and that company distributed a 3.5% dividend annually, I’d receive $35 by the end of the year.  If I reinvested that $35 to now have $1035 invested, the dividends collected the following year would be $36.22.  By continuing this process of reinvesting dividends, after 20 years that original $1000 investment would be worth $1989.79 without contributing and thats not including: possible share price increase, possible dividend increases, possible stock splits, mergers etc.  If there are regular contributions made to that investment the process speeds up exponentially, as they say, time is money.

In conclusion, to build your net worth:

1. Spend less than you make.

2. Pay off your debts starting with the highest interest rate.

3. Save and Invest, make your money work for you

Good luck on your journey to increase your own net worth.