Why we focus on net worth

There are many ways of looking at your finances, but none more important than your net worth. Net worth signifies your assets and liabilities, or how much you have versus how much you owe. It shows you a snap shot of your financial worth at a certain point in time. This is the statistic most relevant to the journey of personal finance.

Net worth can be classified as the simple equation:

Assets – Liabilities = Net worth

For example, let’s say we have $50,000 in the bank and $30,000 in student loans, which gives us a net worth of $20,000.

It’s important to focus on and track your net worth as it gives a sense of how you are progressing financially. If your net worth is routinely increasing, that means you are saving more than you spend. Conversely, if your net worth trends downward, you are spending more than you make. Your net worth will fluctuate, don’t get discouraged, there’s always bills and life happens. That’s why net worth is so great, it quickly shows you how well, or poorly, you are doing financially and allows you to correct or improve habits.

Coming out of college it is extremely common to have a negative net worth due to student loan debt. According to the Federal Reserve’s latest Survey of Consumer Finances, approximately 50% of millennials aged 25-29 have a net worth of less than $10,000. About 30% have a negative net worth. While these numbers decrease with higher age groups, showing that net worth typically increases with age, millennials should begin to focus on this statistic now to increase long term quality of life.

The two ways to increase your net worth quickly are to either increase your assets (ie make more money) or decrease your liabilities (ie paying back debt). Since the former can be difficult to increase when you’re new to working world, the best way to increase your net worth is to focus on paying off debt.

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