Why is Net Worth Important?

By: Cliff Ritter on November 24, 2012

Net worth is an important number, and should play a major role in your personal financial decisions.  Net worth is the remaining value of your assets after you subtract your liabilities, which ideally should leave you with a net positive balance.  As you increase the quantity of assets to your name, your net worth will increase and provide you with improved financial stability.

Unfortunately, net worth is often considered irrelevant until outstanding liabilities overtake the total value of assets.  For example, most students will have a student loan to pay for school, and several are just as likely to have one or more credit cards.  Similarly, for working professionals, unexpected surprises such as a sudden loss of employment and difficulty finding new work over a long period of time will reduce net worth due to a loss of substantial earnings.  Consequently, in order to make up the difference, you may be forced into selling fixed assets such as your home to inject new cash flow and improve your net worth.

It is very important to track your net worth, especially as you grow closer to retirement.  Certified Financial Planner Cecilia Tsang recommends you become aware of how to improve your net worth.  As your level of income grows, make fixed monthly deposits into RRSPs and tax free savings accounts.  Tsang says this will increase what you own rather than managing what you have, and there is a very big difference between the two in relation to net worth.

“As your income grows, increase your savings or debt payments according to the same proportion.  If you do this early on, you'll get into the habit of paying yourself first for later.”

As you pay the mortgage and other liabilities down your household net worth will improve, which will help you set realistic personal financial goals for retirement.  Stay focused on tracking your net worth, make updates when you can, and remember to plan what is best for only your financial security.