Net Worth-Definition

I have touched base on this before but it is an important enough term to make it an entry under our Financial Lingo Category. It is interesting, my personal financial goals were based on Net Worth, that is how we measured how were doing. And we felt we were doing well and growing as we should. Well in this economic environment, like many other things, Net Worth is going down for many, for some at an alarming rate.

Net Worth is Assets minus Liabilities. Let’s break that down to easier terms to understand, it is basically everything you own minus everything you owe. Since what we “own” is based on, for a lot of us, the house we live in and its equity and the 401K or stock portfolio, perhaps some rental properties, or other investment vehicles. If those Assets are what they were worth 18 months ago, you are already ahead of the game, for most of us, this category’s value has decreased. Hence the equation of Net Worth will at best maintain, if we can drop those liabilities along with our falling values. Realistically that won’t happen so our Net Worth is dropping before our eyes, but if we are honest…..our Net Worth had grown before our eyes as well.

So at this point it isn’t wise to base your financial goals on Net Worth but perhaps to better set those goals on deleveraging or decreasing your liabilities (what you owe). That is what we are personally working on, our goal, to drop 10% liabilities per year. So even if our net worth continues to decline over the next 18-24 months we are at least counter-balancing that drop with a drop in our liabilities as well.

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~ by debt2dreams on March 25, 2009.

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