What Is Net Worth and Why Does It Matter
Net worth can seem like a complex calculation, but it is actually quite simple:
Total Assets − Total Liabilities = Net Worth
In essence, your net worth reflects how much wealth you own after accounting for all debts and obligations.
But what is an asset? And what is an obligation?
Assets are items you own (or have an ownership interest in). They can include:
- Cash and cash equivalents
- Investments like stocks, bonds, and mutual funds
- Real estate
- Retirement accounts
- Personal property like vehicles, jewelry, artwork, collectibles, and firearms
Liabilities are debts or financial obligations you owe. They can include:
- Mortgage loans
- Auto loans
- Credit card debt
- Student loans
- Personal loans
- “IOUs”
Growing your net worth is a worthwhile long-term financial goal. A higher net worth will give you greater financial security and stability. You’ll have a cushion to protect you against unexpected expenses and won’t need to worry about being “underwater” on a house or vehicle if you suddenly lose your income. Increasing your net worth can also give you more flexibility and freedom in your choices.
It can seem like an insurmountable hurdle, especially if you’re just starting out. Below, we’ll discuss how to set clear financial goals, customize your investment strategies, and allocate your assets. You’ll also be able to use our interactive Net Worth Calculator to assess your net worth and see where you might need to improve.
Understanding Your Financial Goals
Growing your net worth requires a certain level of strategy and planning. Just like you wouldn’t head on a road trip without looking at a map and plotting your stops, you shouldn’t try to increase your net worth before evaluating your current financial situation and identifying improvement areas.
Use the Net Worth Calculator below to understand where you stand financially. Then, begin thinking about your short-term and long-term financial goals. Your goals should be SMART—specific in what you want to achieve, measurable in terms of progress, achievable with your resources and limits, relevant to your overall life goals, and time-bound with a clear deadline.
Some common examples include:
- Paying off debt
- Saving for a vacation
- Building an emergency fund
- Buying a home
- Expanding your family
- Funding your education or your child’s education
- Retiring early
First, rank these goals in order of urgency and importance. Consider factors like the impact reaching each goal will have on your overall finances, the personal significance of each goal, and how time-sensitive these goals will be to achieve.
Then, assign specific dollar amounts and timelines to each of your goals. You can track your progress more easily by breaking it down into smaller monthly or quarterly savings targets.
Finally, focus on addressing your high-priority goals while balancing your short- and long-term objectives.
Customized Investment Strategies
Personal finance is just that—personal. Your investment strategies should also be personal to your risk tolerance, time horizon, and financial goals. If your strategies are too aggressive for your needs, you may be tempted to panic-sell in a market dip. And if your strategies are too conservative, you may be frustrated by your lack of investment growth.
At Capital Growth, our financial experts can help walk you through this process to develop a tailored investment plan. Your ideal plan will maximize returns and mitigate risks while comporting with your moral and ethical objectives. For example, if you’re concerned about climate change, you may want to look into ESG investments that avoid investing in funds holding fossil fuels.
Diversification and Asset Allocation
Diversification is a risk management strategy that spreads investments across different asset classes, sectors, industries, geographic regions, and investment vehicles. When done properly, diversification can reduce your portfolio volatility and enhance your overall returns.
The basic idea behind diversification is to minimize the impact of individual investment risks on your overall portfolio by investing in various assets with non-correlated or negatively correlated returns. Capital Growth is committed to spreading investments across various asset classes in a way that fits your overall goals. As the saying goes, we never like to put all our eggs into one basket.
Tax-Efficient Strategies
Not all investments are created equal when it comes to taxes. Funds withdrawn from a Roth IRA will look very different than funds withdrawn from a 401(k)—and even funds held within these accounts can be treated differently when they generate dividends and interest. For example, it’s often best to hold municipal bonds in a taxable account because any interest generated won’t be taxed at the federal level.
At Capital Growth, we’ll help you gain insight into the tax-efficient investment strategies that work well for you. We’ll optimize your portfolio to help you preserve and grow your wealth without losing ground to taxes.
Interactive Net Worth Calculator
This net worth calculator will help you assess your net worth and track your progress.
Consider logging your net worth quarterly or annually to spot trends over time.
Partnering with Capital Growth
With new companies and technologies constantly hitting the market, keeping up with trends in investment strategies and tax efficiency can be a full-time job. Partnering with the wealth management team at Capital Growth can give you the tools you need to thrive.
Our financial advisors can help you assess your financial goals and explore customized wealth management strategies. Schedule a free consultation with one of our experienced advisors today.