Now that you've determined your cash flow,it's time to figure out your net worth. What is this? It's what you own,such as your house,car,savings,and stocks (known as assets),minus what you owe,such as your mortgage,car loan,student loans,and credit card debt (known as liabilities).
What's the point of such calculation? Think of it as an annual physical exam,except this test measures your fiscal fitness.While your cash flow tells you how much money comes in (your earning) and how much money goes out (your expenses),you net worth tells you what kind of financial shape you are in overall.And this will help you set realistic budgeting goals.Foe example,if you have a positive cash flow but a negative net worth (due to car loans and credit car bills),a good budget will help you direct some of that extra income to paying down your debts and building financial security.
Calculating your net worth is important for other reasons,too.You'll need to this information when applying for a loan,writing a will,or buying insurance.Lenders,for example,will check your debt-to-income ratio when you apply for a mortgage.And universities ask detailed questions about parents' assets and debts when a teenage applies for college financial aid.Your net worth also serves as a benchmark with which to compare your financial progress.Do you have more credit card debt today than you did 10 years ago?Has your home increased in value?Have you borrowed against your assets?Your goal,naturally,is to raise your net worth over time,which a budget will help you do.But before you can draw up this all-important budget,you must first have a clear idea of what you own,how much it's worth,and how much debt you currently owe.
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