Net worth is a measurement of personal wealth at a specific moment in time. Previously, we discussed personal financial statements. Specifically, we furnished details of the net worth statement. In summary, the net worth statement includes assets, liabilities, and net worth. Here is the basic formula: assets, minus liabilities, equal net worth. Net worth can increase, remain unchanged, or decrease.
Net worth increases when assets appreciate or when we retain income, receive a gift, inheritance, or forgiveness from debt.
Net worth remains unchanged when we pay off loans, lines of credit, or credit cards with cash, or when we buy an asset with cash. Cash is queen in personal finance. Purchasing an asset with 100 percent cash reduces cash as an asset but adds another asset by the same amount resulting in no change to net worth. Purchasing an asset with borrowed money, or a loan, reduces cash for a down payment, but if the asset secures the loan, then it is a liability on the financial statement and the result is no change to net worth. Leasing or renting also has no effect on net worth.
Net worth decreases if we make a lump sum cash payment to secure a rented or leased asset. The initial payment results in a decrease of net worth. Net worth also decreases when using cash for consumable items.
Follow these seven guidelines to improve net worth:
Question: What are you doing to improve your net worth?
Chris Bryant is an American financial advisor.