One of my favorite subjects is wealth building. At the most basic level wealth, at least your financial wealth, is your net worth. Although there are many beliefs and philosophies on how wealth could be accumulated, the mathematical nature of wealth is all the same: Wealth = Net Worth = Assets – Liabilities.
How Net Worth Works
Here’s a little graphic to help us visualize this concept:
So what are some basic facts that we could derive from this?
- Net Worth: If you want to increase your wealth, all you have to do is increase your assets and reduce your liabilities
- Assets: If your income is higher than expenses, then your assets go up. You could use the extra money to:
- pay down your debts, thus reducing your liabilities
- save and invest, thus increasing your assets
- the net effect is increased wealth or net worth
- Liabilities: If your income is less than expenses, then there is a deficit. This could result in:
- you’re forced to liquidate your assets to cover the extra expenses, thus reducing your assets
- you’re forced to accumulate more debt, thus increasing your liabilities
- the net effect is decreased wealth or net worth
How to Calculate Wealth
If you use a tool like Personal Capital, it is straightforward to see your net worth. Personal Capital works by linking your investment accounts, bank accounts, credit cards, and loans and aggregating all the data into one place. You can also list any other assets and liabilities that cannot be linked. Once this is all set up, the software will show you what your net worth is currently.
You can also calculate your net worth manually, follow this guide, How to Calculate Your Net Worth to do the calculation.
12 Steps to Build Wealth
The general concept is easy, but the process of building wealth is a little more involved. Over the years, I have worked to refine the process of building wealth and distilled it to these 12 steps as follow:
- Make a Commitment to Improve Your Finances
- Start Tracking Your Income and Expenses
- Boost Your Finances with Quick Wins
- Set Up a $1,000 Mini Emergency Fund
- Pay Down Your Debt
- Increase Your Income and Begin Investing
- Complete Your Emergency Fund and Personal Financial Plan
- Invest Your Money
- Buy a House
- Manage Your Risks
- Plan for the Future
- Pay It Forward
Wealth = Net Worth = Assets – Liabilities.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.