We are often hung up on how much someone is making, the car that they are driving and the house that they are living in. Rarely do we consider their net worth, or ours for that matter. This may be because net worth is much harder to determine from just looking at someone. The fact is, the most flashy among us typically have the least wealth. If you know and focus on your net worth instead of material things, you will make decisions to ensure that your net worth gradually increases over time. Knowledge is power!
Do You Know Your Net Worth?
On a basic level, your net worth is equal to your assets minus your liabilities. Unsurprisingly, the younger you are, the more likely that your net worth will be zero or below. But this does not mean that you should keep the full picture of your financial situation in the background. Knowledge is power!
If I asked what is your salary, it is likely that you would be able to provide the answer. If I asked you for an estimate of your credit card debt, mortgage balance or student loans, I am certain that you can provide an estimate. What happens if I asked about your net worth? Could you provide an estimate? I figure the answer is likely no.
It is important to know your net worth because with this information, you can knowledgeably plot your financial path forward. If you do not know what your current financial situation is, how can you plan your financial future? How can you determine how and where to allocate funds? The fact is, you cannot plan your financial future without knowing your net worth.
What Happens When You Do Not Know Your Net Worth?
Have you ever heard the following scenario: A family having the largest home on the block, having two or more luxury cars and who goes on vacations yearly, goes broke in view of the smallest of financial hiccups. How does this happen?
It is always a shock to see someone with the largest home on the block, who has the best suits, the luxury cars and the yearly vacations go broke when they lose their job. This is surprising but it should not be. You see, the people who are watching and growing their net worth are not spending big on cars, homes and vacations. It is really not the case. If you are spending so much on these things, it is much harder to grow your wealth. You are more likely to grow your debt. With increase debt, your chances of living pay check to pay check increases, no matter how much money you are making. This is where the house of cards related to a fake wealthy facade will begin to crumble.
Eventually, the debt will overcome your take home pay. If you are unlucky enough to lose your employment, the house of cards will fall at an accelerated pace until you go into foreclosure, lose your cars. At some point, the facade of being fake wealthy will disappear.
Focus On The Big Picture
The problem with not knowing your net worth is that you are likely not making informed financial decisions. You are making financial decisions based on an incomplete view of your finances. For example, the problem we all typically run into is our focus on salary. We all aim to maximize our salary but may not be paying attention to the costs that potentially goes with it. Think about it this way, if your salary is $100,000 with no retirement contributions from your employer vs a salary of $95,000 with $10,000 automatic contributions to your retirement by your employer. Which do you choose? Are you seeing the bigger picture?
Further, in some instances, it may be beneficial to pay off debt based on the interest that is accruing rather than investing/saving. But without a complete picture of your finances, are you making the right decisions? Knowing your net worth provides a constant check and awareness of where you are financially. Knowledge is power!
Conclusion
We are often hung up on how much someone is making, the car that they are driving and the house that they are living in. Rarely do we consider their net worth, or ours for that matter. The fact is, the most flashy among us typically have the least net worth. If you know and focus on your wealth instead of material things, you will make decisions to ensure that your wealth gradually increases over time. Knowledge is power!
See your complete financial situation and make decisions that will provide financial security.
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