I have been calculating my net worth for years. It’s been a fascinating way to determine whether or not I’m actually making progress on my financial goals. Naturally, the big thing I’ve been focusing on is increasing my income and decreasing my expenses. It’s the easiest way to see progress in my savings accounts. But net worth is more than just money in your bank accounts. So let’s look at assets that affect net worth.
One of the biggest assets that affect net worth is the equity in my house. Equity is the amount your house is worth minus what you owe on your mortgage. If you timed the market well when you bought your house, your house value should continue to grow while you pay down the mortgage, which helps your net worth increase even faster. Of course, with any property ownership, there’s always the chance that the asset could decrease in value, which is what happened to a number of homeowners who bought near the top of the housing bubble. Our goal is to have the house paid off well before retirement, which will significantly decrease our monthly expenses.
Some people are lucky enough to own second homes, either vacation homes or rental properties. These also help you grow your net worth in the same way. It’s definitely not for everyone, but I have a few friends who have bought vacation homes and then hired companies to help them manage and rent the property. They may not be bringing in a lot of income once they pay the mortgage and fees, but the property values are increasing, and when they’re ready, they can either use the home as a long term vacation site or retirement home, or they can sell it for a profit.
Your investments are another major asset that affect net worth. Investing in the stock market can a great way to grow your net worth, but it comes with varying levels of risk. With higher risk comes the potential for higher rewards. Safer investments may grow more slowly, but are less likely to lose money. And of course, there are times of economic downturn when all investments take a hit.
Investments include your retirement accounts as well as any other stocks and bonds you may own outside of your 401k or IRA. It can be easy to forget about your retirement accounts when you’re thinking about your net worth, because it’s not money you can use anytime soon. But it’s always good to keep those growing.
I know what you’re thinking. Education is an expense, not an asset affecting your net worth. And it’s certainly easy to think of it that way, especially when you’re still paying off college loans. But an education, be it at a 2 year college, a 4 year college, or a trade school, can have a major affect on your net worth in terms of increasing your earning power. This can also include additional certifications that can bring in more money. Don’t discount the value of an education as an asset that affects net worth.
What About Collectibles?
Collectibles are a tricky area when it comes to net worth. A lot of people will say “I have a collection worth X amount of money.” Which may be true, but really, it’s only worth what someone will pay you for it. That’s true for basically everything, but some things are much more regularly in demand, like houses and land. You might have a really cool collection of sports memorabilia, but it’s only worth what someone will pay you for it, no matter what you paid for it. That doesn’t mean that you shouldn’t acquire collectibles if they make you happy. But don’t plan on paying for your retirement with your collectibles.