It has been seven years since I was introduced to Robert Kiyosaki’s “Rich Dad, Poor Dad”. The central theme of this book preaches accumulating assets, while decreasing liabilities. He illustrates this by explaining the upbringing he experienced with both his rich dad and his poor dad. The rich dad teaches him to work on acquiring investments while the poor dad believes education and getting a good job is key to being successful. The book does a great job of shifting the relationship and mindset in accordance with money and the accumulation of it.
The amount of assets and liabilities one possesses determine what is known as net worth.
Asset: Investopedia defines an asset with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.
Liability: According to Investopedia, liabilities are a company's financial obligations that arise during the course of business operations. To bring this to a individual level we will define it as anything that takes money out of your pocket, i.e. bills, entertainment, transportation.
This term is often hard to clearly understand because of its ambiguity. The point of this post is to clear up any confusion surrounding this term. The two things that need to be computed are debt vs the present day value of everything a person owns. Net worth simply comes down to subtracting the cost of all debts from the value of all possessions. Wealthy people focus on net worth because net worth can be leveraged to obtain more assets.
If you are anything like me, I often go to celebritynetworth.com to check on my favorite athlete or entertainers wealth. For instance if you search someone like Floyd Mayweather Jr. on the site you will see his current net worth sits at $340 million. This does not mean he has that amount of money in his bank account. What this really means is that total value of everything he owns (cash, cars, properties and jewelry) minus the debts on everything he possesses total $340 million. He could easily have a total value of $500 million between bank accounts, cars, real estate etc while having debts of $160 million, leaving him with a net worth of $340 million.
The goal for all individuals should be to accrue as many assets as possible while paying down as much debt as possible. This will put you on the winning end of the net worth game.