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This number is more important than your salary

Earning more and being frugal are often cited as the keys to financial success.  Increasing your salary and cutting expenses though are only part of the picture.  Your net worth is the true gauge of our financial success and building net worth needs to start very early in your financial life.
What is a simple definition of personal net worth?
It’s your real overall financial position or your bottom line so to speak. It’s everything you own or have saved minus all that you owe.
Does a higher salary always equate to a higher net worth?
It doesn’t always work that way. As one salary increases it often leads to a higher level of debt and increased expenses. Salary alone isn’t a driving force in creating net worth.  Earning more and spending less certainly are important ingredients for building net worth but not the only financial skills that are required.
What else is required to build net worth effectively?
One of the most important aspects of building net worth is making smart choices early in life, this includes saving early, buying the right type of assets and not overspending on assets that can have a negative impact on net worth over time.
What are foundational aspects of someone’s net worth?
Real net worth is derived from what you own that is an appreciating asset.  This can include real estate, businesses, stocks, mutual funds and 401k or other retirement funds. All of these items normally increase in value over time.
What would be an example of a depreciating asset?
The most common is the car and others include recreational vehicles like boats, campers, and off road vehicles.  Most of these items are not going to contribute to positive net worth because their value tends to fall over time and if you use debt to purchase these items, the impact to net worth will be even more drastic.
It is quite possible that many younger people have a negative net worth, is that a problem?
Doesn’t have to be a problem if they focus on building and/or buying appreciating assets.  Negative net worth can be a temporary situation.  Most negative net worth is caused by owning too many depreciating assets and having a high debt load from credit cards and student loans.
If you have a low or negative net worth what should be done to increase it?
It does start with finding ways to earn more and spend less so that you can pay down debt but it also requires making smart financial choices such as meeting the match on 401k, not overbuying on the choice of cars and thinking about real estate as an option to build net worth.

Posted: 9/1/2016 with 0 comments

Categories: Financial, Investments, Money Matters, Saving

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