Increasing Your Net Worth: The Measurement of Real Wealth

The following is a guest post contributed by Tom Cleveland, who writes for Forex Traders.

Each year, Forbes magazine publishes a list of the wealthiest people in the world.  Of course, the names at the top of the list are household names—Warren Buffet and Bill Gates.  Forbes rates the wealthiest people in the world by their net worth.  Net worth is simply a person’s total assets minus their liabilities.  Although you may not be fighting to get your name on the Forbes’ list, chances are good that you have a definite interest in building your net worth.

Practical Step to Building Net Worth

Let’s return to the definition of net worth once more.  It is defined as a person’s assets minus their liabilities. Now, this is important to understand.  It doesn’t really matter how many assets a person has.  If they have too many liabilities, the inflated assets will not mean anything.  We see this play out in the business world all the time.  A company may have hundreds of millions of dollars in assets, but it attempts to expand too fast and takes on unsustainable debts, which are liabilities.  In corporate America, this eventually leads to bankruptcy.  A company that has hundreds of millions of dollars in assets, but also has $2 billion in outstanding liabilities, is headed for total collapse.  Thus, the way to build net worth is not to necessarily focus on building assets or a forex account, but to rather eliminate liabilities.

Eliminating Liabilities

The three primary liabilities that most middle-class Americans have are a mortgage, a car loan, and credit card debt.  The real way to build true, lasting wealth is to focus on eliminating the most destructive of these three types of liabilities—credit card debt.

Credit card debt is a major hindrance of wealth creation.  Ultimately, it is wise to buy assets in order to build net worth.  When hundreds of dollars are being spent each month paying credit cards off, this money could be going toward purchasing those assets.  Thus, one of the first steps that must be taken to build real wealth is to pay off all credit card debts in order to eliminate this liability.

Adjust the Budget

The most practical way to quickly pay off credit card debt is to honestly analyze your monthly spending habits and discover every area that could be cut back and eliminated.  Once you find out how much can be eliminated each month, then decide to shift this extra capital toward paying down your credit card debt.  This will not necessarily be fun and exciting, but it will help put you into a place of financial strength once the liability is eliminated and you can direct that extra capital into purchasing assets.

Further Reading:

How to Fight a Credit Card Interest Rate Change

Should You Spend Money on Budgeting Software?