Saturday, April 23, 2016

Teach Kids Net Worth Is Important, But Unrelated To Self Worth

Today’s fantastic family finance article is:

Self Worth As Non-Function Of Net Worth

Net worth is a measure of your financial value. It’s a very important number to teach your kids how to calculate and track.

Here’s how you do it:

  • List the key things you own. List the current balances of any checking, savings, and investment accounts. List the trade-in value of your car if you have one. If you owned a home, you’d list its current market value. Leave out the little stuff, or things that can’t be realistically converted to cash.
  • Add all those numbers together. That’s your total assets.
  • Now list all the things you owe. These are typically loans of some form. Your current credit card balance. The amount owed on student loans or a mortgage.
  • Add all those numbers together. That’s your total liabilities.
  • Now subtract your total liabilities from your total assets. That’s your net worth.

To recap:

Net Worth = Total Assets - Total Liabilities

Some key observations to share with your kids:

  • You can have lots of fancy assets — a mansion, a beach house, a Maserati — and still have negative net worth. How? Big hefty loans to finance all those fancy possessions.
  • You can have very modest assets — a small bank account, no home, no car — and still have positive net worth. How? No loans, no debt.
  • Negative net worth means stress. Loan payments due every month. Snowballing credit card debt. Bill collectors calling. No extra cash to handle emergencies. No freedom to pursue your dreams.

So knowing your net worth is important. More net worth means less financial stress and more financial freedom.

But net worth does not measure your kindness.

It does not measure your talents.

Nor your character.

Make sure your child knows that net worth and self-worth are not connected.

Financial value and human value are two unrelated scales.

The bottom line: It’s important for your child to know what net worth is. And what it isn’t.

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