Some of you may be wondering what the heck is net worth? Net worth is a financial planning term that is really my top measurement for personal wealth. I review it every time I meet with my planning clients.
So what is it? Net worth by definition is: Assets – Liabilities = Net Worth
There are lots of good ways to increase net worth, like earning more money, increasing your savings or improving the return on your savings and investments. You should always be playing a good game of defense when it comes to your net worth.
So if you’re out to screw up your net worth, here are some simple suggestions!
I’ve talked about debt in previous posts and in my eBook for business owners. Debt is probably the most serious threat to your financial health and net worth. Call it the cancer of financial health if you will. Not all debt is created equal. Just like some cancers are easier to get rid of than others, some debt is worse than others.
I’m talking about credit card debt. I have a particular disdain for the plastic stuff. Unsecured credit card debt can quickly spiral out of control, spreading like the true cancer it is. My issue with it is the ridiculously high interest rates. We’re the same people that think 7.24% on a card is “a good deal” but a 4.5% mortgage rate is too high.
I also feel that taking on a debt to buy a car, when it is not deductible for a business, is not the best financial move either.
Good debts would be mortgage and educational debt. These can actually improve the quality of your life and in the case of educational debt help you earn more. Look at the formula above…liabilities subtract from net worth.
You cannot be financially secure with little to no savings. When you are not setting aside enough money for an emergency fund or your eventual retirement, you will spend these funds. You need to keep the spending and debt down, and save a dedicated amount each month to wealth creation or retirement. Take a look at that net worth formula above…fewer assets equal a smaller net worth.
Out of Control Spending
Net worth is increased by saving more, reducing debt and investing those savings over time. It’s easy to understand that you will easily destroy your net worth by overspending, dipping into your savings and going into debt. You can easily overspend on credit cards, so keep those in check, use cash or a debit card. I know most of you absolutely hate the word budget, but it makes for a good preventative measure.
Poor Risk Management
Nobody can plan for everything. I totaled up all the insurance I pay out every year and was astounded at the figure. If you really want to destroy your net worth, try not having life or health or property casualty insurance. Just one catastrophic event and it will wipe out a life time of wealth building.
Make sure you insure the things that you cannot afford to replace. This is a sizable threat to your financial well-being. Don’t take it lightly.
I write a lot about how to save more in my blog posts. I thought it might make some sense to talk about what to avoid for a change. Are you destroying your net worth ? If you want to assess your net worth or the potential threats to it, write me at firstname.lastname@example.org, or call me at (8590 225-2596.