What is net worth?
According to Wikipedia.comÂ Net WorthÂ is the total assets minus total outside liabilities of an individual or a company.Â Net Worth is used when talking about the value of a company or in personal finance for an individual’s net economic position.
The equation looks like this: net worth = assets – liabilities
If you have more assets (think stuff) than you have liabilities (think debt), you are said to have a positive net worth. In other words, the value of your stuff outweighs your debt against that stuff.
Why is net worth important?
Net worth, along with Cash Management, gives you a starting point for directing your finances to accomplishing your goals. It answers the “where am I now?”Â question and forms a starting point for future comparisons. Then, year after year, you can track your net worth to see if it’s growing. If it’s not growing, you can try to figure out why, and get yourself back on track.
I find it interesting that worth can be substituted with the word wealth. Wealth meaning prosperity in abundance of possessions or riches, from the Middle English wele “well-being” orÂ weal,Â which is an analogy of health. In other words, wealth is a form of health, but for possessions or riches.
This leads me to the idea that I’ve had in the back of my head for some time now that there is a connection betweenÂ net worthÂ andÂ self worth. While I have not done the research to verify it, I’d wager, even though a large net worth might not equal tremendous self worth, a negative net worth might reflectÂ a negative self worth.
To improve your net worth read my postÂ Developing a Millionaire Mind with Net Worth.