Do you know what your net worth is? Net worth is your assets minus your liabilities. If you look at this formula, you should notice that net worth increases by increasing assets, and by decreasing liabilities. It is absolutely vital that you understand how both your assets and your liabilities play a part in affecting your net worth. Now let us look at how you can manage both aspects of net worth in order to create wealth and eliminate debt.
First, we need to focus on your assets. Not all assets have the same value when it comes to promoting the growth of long term wealth. The true key when it comes to wealth creation is to control the assets that create wealth. In other words, you want to focus on assets that are capable of increasing in value, allowing you to increase your personal net worth over time as well.
Here are some of the different types of assets that are wealth creating in nature –
- Your home, because of the equity.
- Real estate
- Savings Accounts
- Mutual Funds
- IRA Accounts
- Other Investments
Now of course, there are a number of other types of assets that will not have any impact on your wealth creation, but that you still may find yourself needing to purchase out of pure necessity, for entertainment purposes, or for a myriad of other reasons. Some of the non wealth building assets out there are as follows –
The important thing that you need to get out of this lesson is that the more money you spend when it comes to wealth building assets, the faster you will be able to achieve a much higher level of net worth.
Wealth building assets are also capable of determining what debt is good, and which types of debt are bad. The best situation overall is to have no debt at all, so avoid it if you can. However, some debt may still be accumulated in your life despite all of your best efforts. Luckily, not all debt is created equally and some debt is not as bad as others. Good debt, for example, is debt that is used as a means of purchasing wealth building assets. Bad debt is the type of debt that is used to purchase assets that do not build wealth.
If you take out a loan, for example, and use it to purchase a home, this can be considered a good form of debt because the home will probably increase in value over a period of time. If you use your credit cards to buy electronic products like iPods and stereos on the other hand, this is going to create bad debt because the assets will not increase at all in value, and will more than likely depreciate in value instead.