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The one number that really matters

When attempting to assess your financial situation you could use a variety of different measurements to make a determination. There is only one number that matters the most in the long run and understanding this number can help you have a better understanding of your success in improving your financial situation.
What is the one number we should all be measuring?
I believe the most important number is your net worth. This is all of your tangible assets minus all of your outstanding debts. I like this number because it can be relatively easy to determine and also it is easier to understand the trends.
What are examples of tangible assets?
This could be your home, your car, savings, investments, retirement plans and even household furnishing. Jewelry and other valuables such as art work would also be considered part of your tangible assets for net worth purposes.
Why is focusing on net worth so valuable?
The change in your net worth from year to year provides an easy answer if you are doing better or worse financially. If it is climbing, you are doing better, if it is declining you are doing something that is making your financial situation worse. Net worth is also an early warning sign of pending financial problems.
What should one do if their net worth is declining?
Start digging in to see what is causing your decline as it can be a multitude of reasons. Maybe you have added significant debt for depreciating assets, or maybe you have spent your savings on items that don’t add to your net worth or perhaps you are living beyond your means and running up credit card debt.
What are ways to build net worth?
Buy appreciating assets such as a home or a make investments, keep adding to savings especially your retirement plan, and control the amount of debt used on expenses such as vacations and depreciating assets.  There are expenses we need such as cars and home furnishing that will retain some value, but the value will never exceed the cost of these items in most circumstances.
Are there concerns if your net worth is negative?
It totally depends upon your age. Most people, when starting out will have a negative net worth due to student loans and the lack of any tangible assets that provide value. The real key is the trend is your net worth growing or are you digging a deeper negative net worth position.
How often should someone calculate their net worth?
Best practice is usually to only calculate it one time per year to be able to recognize any trends. If you are making significant changes to your assets, it is always good to review the short term and long term impact on your net worth however.

Posted: 9/18/2017 with 0 comments

Categories: Finances, Money Matters, Planning

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