Simply put, net worth is the difference between the value of what we own and the total amount that we owe. Why does it matter? It’s one way to tell if we’re really getting ahead. Knowing our net worth helps us set goals for our money, make financial plans and track our progress. The most important thing with net worth is not how high it is, but rather which direction it’s headed – may it always be trending up!
Net worth is a way of measuring our wealth. It's the amount of cash we'd have if we sold everything and paid off all our debts today. Overall, our financial goal should be to increase and protect our net worth over time.
The safest way to improve our net worth is to reduce the amount we owe, rather than relying on the value of the things we own to increase. For example, property values can fall at times. Rising interest rates will also increase the cost of our debt.
As long as we’re either paying down debt or saving and investing, our net worth will head upwards.
Net worth is important when we're thinking about retirement. Most of us want to be debt-free, own a house and have some money to live on when we retire. So before retiring, our main financial goal should be to increase our net worth over time.
Once we retire, however, our goal may be to reduce our net worth, by using up our savings or selling assets to fund our retirement. But we need to make sure we don’t run out of money before we run out of time!
It's easy to work out your current net worth with Sorted’s net worth calculator. Once you figure out the difference between what you own and what you owe, you can set targets for the future.
Knowing your net worth will help you set goals, which you can review every year or so.
These goals could be, for example, to reduce debt, increase savings or to buy an asset like your own home.