When we see others driving expensive cars, we think they are rich. When we see others living in big houses, we think they are rich. When we see others spending a lot of money to have an amazing lifestyle, we think they are rich. When we see others earning big bucks, we think they are rich. But is it really true?

In my recent article <The One Skill That We Don’t Learn in School but Costs Us a Lot of Money>, I have told two stories to show you that how much you earn does not mean how rich you are, how much you save does not mean who rich you are. So what is the single most important parameter to define your wealth? It is your net worth.

What Is Net Worth

According to Investopedia, net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company’s health, providing a useful snapshot of its current financial position. Net worth is a quantitative concept that measures the value of an entity and can apply to individuals, corporations, sectors, and even countries. Net worth is used to define how wealthy a person is. That is why in wealth management, banks call their clients who have substantial net worth high-net-worth-individuals.

Net worth = total assets – total liabilities

I will give you two extreme scenarios here that you will understand the differences between ‘cashflow wealthy’ and real ‘asset wealthy’.

Rachel works in the investment banking sector, he earns on average $10,000 per month. She bought a huge house which costs $1million and has a mortgage of $0.9 million. She then has a student loan which he did not pay back with an outstanding balance of $50,000. He drives the newest model of BMW with a value of $55,000, a total loan value of $50,000. She has $20,000 in savings but most of his money earnings go to pay mortgages and car loans as well as to support his luxurious lifestyle.

• company shares

• cash

• investments

• real estate

• collectibles

• others

What are liabilities

• student loans

• mortgages

• car loans

• personal debts

• tax owed

• others

Why a person’s wealth is defined by net worth

II will give you two extreme scenarios here that you will understand the differences between ‘cashflow wealthy’ and real ‘asset wealthy’.

Rachel works in the investment banking sector, he earns on average $10,000 per month. She bought a huge house which costs $1million and has a mortgage of $0.9 million. She then has a student loan which he did not pay back with an outstanding balance of $50,000. He drives the newest model of BMW with a value of $55,000, a total loan value of $50,000. She has $20,000 in savings but most of his money earnings go to pay mortgages and car loans as well as to support his luxurious lifestyle.

Many of you would want to live like Peter, don’t you?

Here is Rachel’s total assets and liabilities:

House: $2million – $1.9million = $100,000

Car: $55,000-$50,000=$5000

Saving: $20,000

Debt: $50,000

Total net worth = $100,000 + $20,000 – $50,000 = $70,000

On the other side of the city, Peter works as a data analyst in a telecom company. He earns $4000 per month. He saved and paid off all his student loans and living in a small apartment which he is now renting. He has no car and goes to work with public transportation. After 5 years of saving and investing, he has now $121,206 in his investment, as calculated in our last example from previous article.

Here is Peter’s assets and liabilities:

Savings and investments: $121,206

Debts: $0

Total net worth: $121,206 – $0= $121,206

Clearly, Peter has more net worth than Rachel even though he doesn’t own those fancy items such as a big house or a luxury car. In this case, Peter is the richer one.

There are many examples in our daily lives that someone might seem rich but they are really not. ‘cashflow wealthy’ and real ‘asset wealthy’ are not the same. The only parameter to define your wealth is your net worth.

Why we need to track net worth

If you want to be richer, you need to grow your net worth. You only can grow your net worth when you know what is your current net worth is.

Once you start laying out all your assets and liabilities, you can then pick items per item to either grow or decrease it. For example, if you have a student loan, work on reducing the outstanding loan value, payback some amount every month. This loan value will decrease in your net worth tracker. As a result, your total net worth is increasing.

On the other hand, work on increasing your savings every month by eliminating small but non-essential expenses, over time those accumulate to a bigger sum and that is added to your net worth.

It has been proven by thousands and thousands of people that tracking your net worth consistently will help you grow your net worth.

Start tracking your net worth now. Download a net worth tracker below.

Download Free Net Worth Tracker