The One Number That Makes You Rich: Net Worth

The One Number That Makes You Rich: Net Worth

The One Number That Makes You Rich: Net Worth

Find this post helpful? Share it!

When talking about personal finance there can be a lot of clutter and since you are reading the blog that tells me you are hoping to simplify this giant ball of chaos. To keep with that theme I want to teach you the one and only number you need to focus on to become rich, net worth.

What is net worth? Well, that is simple. Think about ordering a pizza online and the dozens of different options. You can get pepperoni, veggies, thin crust and so on. These toppings represent items in your financial story. Maybe you have a car loan, money in a savings account, or you own a house. The point is each pizza is different because we each have different aspects of our financial life right? But when we each make our own pizza and the final product comes out of the oven we all have a single pizza. Now to tie all of this back into net worth, when we each add in our different forms of income, expenses, and debt we get one single number, net worth.

The reason net worth is the number that will make you ‘rich’ per se is because to calculate if you have to know almost every part of your financial story. How will you know if you are going to be rich? Well, like all things we each have our own definitions of what rich means and below I will show you how to calculate net worth as well as project it out into the future to see if you are hitting your financial goals.

Calculating Your Net Worth

Calculating your net worth is incredibly easy all you have to do is follow this equation:

Assets – Liabilities = Net Worth

Now, I’m going to assume most of you do not have an accounting degree and that is perfectly fine. While I think explaining assets and liabilities is important this is not the article for that. Instead, let’s expand things out a little bit and fill out the chart below.

I went ahead and included the most common assets and liabilities but do not be surprised if you need to add another line on either side. If you are still a little confused here is a filled out example:

As you can see this person has a positive net worth of just over $50,000 that is extremely good. Your net worth may be higher, lower, or even less than $0. While that is obviously not ideal you are now at least aware of it and we can start building a plan to get you on track to become rich.

Projecting the Future

There are two decent ways to project what your net worth will be in the future. I say decent because none of us actually have crystal balls to know exactly what will happen. The first way is just saying that you will increase it by a certain percentage each year. How you will increase your net worth in your early years is by reducing your debt. Later on, when your debt is gone you can start saving more in your retirement/savings account but that is all out of the scope of this article.

Back to picking a percentage. Let’s say for this example they think they can increase their net worth by 5% per year. This is a fairly conservative number but it is always good to be a little low on these things. Using the fancy future value equation of:

Current Value x (1 + Rate of Return) ^ Number of Years = Future Value

Which with our numbers would look like this:

$50,500 x (1 + 5%) ^ 50 Years = $573,370

With this person growing their net income at 5% per year for 50 years that will have a positive net income of over $550,000. Now that is a lot of money.

The second way and a more accurate way is to use your past data to get your percentage of growth. This means you’ll need to know to net worth over a period of months or better yet, years.

For example, let’s say that this person’s net worth went from $43,000 to $45,000 to today’s number of $50,500. That means that they grew 4.4% from year 1 to 2 and 10.9% from year 2 to 3. What you can then do is take the average of that, which in our case would be 7.7%. Now plug this number into our future value equation from above.

50,500 x (1 + 7.7%) ^ 50 Years = $2,040,587

Two million dollars! I think all of us like the sound of that. Remember though this isn’t a crystal ball but just an estimate of where you could be. Of course, as you get more data samples you can more accurately predict what you are on track for. A word of warning though, before you can even think about the future you need to do whatever you can to make sure your net profit number is positive. That is the first step to becoming ‘rich’.

 

Eliminating debt and increasing your income will be covered in later articles, but I hope that this can give you an insight into what is possible. People think that becoming a millionaire is just for professional athletes and movie stars when in reality it’s much closer than they think. If you have questions or need help calculating your net worth, drop me an email by using the contact tab above.

Lastly, do me a favor and join the weekly newsletter below. We won’t spam you or anything like that, just a weekly email keeping you up to date.

 

Find this post helpful? Share it!

Leave a Reply

Your email address will not be published.