What Is Net Worth and Why It’s So Important
Do you know your net worth straight away? If you do, then you’re on the right track already and all you have to do is to increase it. Yes, we know, easier said than done – but in the second part of this article we will tell you all about it. However, if you do not know what your net worth is, let us start there, let us show you how to calculate it first. Knowing your net worth is the starting point if you really want to increase your financial health.
In fact, net worth is measuring exactly that – your (or a company’s) financial health. The calculation is fairly simple to figure out once you know it. Your net worth is all your liabilities subtracted by all your assets. So, the more assets you have, the higher your net worth is, the richer you are.
Net Worth = What You Own (Assets) – What You Owe (Liabilities)
In case you are more of a visual person an need an example, we got you! Let’s go through a hypothetical. Imagine you have a savings account, maybe some stocks you invested in, an old ford mustang and some credit card debt. These are all your assets and liabilities combined.
- Savings Account: $10,000
- Stock Investments: $5,000
- Car (Ford Mustang): $15,000
- Credit Card Debt: $6,000
Net Worth Calculation:
Net Worth = (Savings + Stocks + Car + Home) – (Credit Card Debt)
Net Worth = ($10,000 + $5,000 + $15,000) – ($2,000)
Net Worth = $30,000 – $6,000
Net Worth = $24,000
At the end of our hypothetical scenario you have a net worth of $24,000 – congratulations. Hopefully that helped you to get a first understanding of what net worth actually means. Now let us dive a little deeper into the matter and see how assets and liabilities can be categorized.
Assets can be broadly categorized into:
- Liquid Assets: These are assets that can quickly and easily be converted into cash without a significant loss in value. Examples include savings accounts, checking accounts, and cash on hand.
- Investments: These represent assets bought with the hope that they will generate income or appreciate over time. Common examples are stocks, bonds, mutual funds, and retirement accounts.
- Personal Property: This category includes tangible items owned that hold value. Real estate, vehicles (like cars and boats), jewelry, art, and electronics fall into this category.
On the other hand, Liabilities are categorized into:
- Short-term Liabilities: These are debts or obligations expected to be settled within a year. Credit card debt and outstanding bills are typical examples.
- Long-term Liabilities: These are debts or financial obligations that are due over a period longer than one year. Examples include mortgages, student loans, car loans, and personal loans.
How Can You Increase Your Net Worth With Crypto
Crypto is most likely to be categorized as under the Investment category in your Assets. Even though one could make the argument that Bitcoin is digital property, for the sake of this article we will still categorize it under Investments. Now we clarified net worth and the role of crypto within it, let us talk about how you can increase your net worth with crypto.
How Can You Increase Your Net Worth With Crypto
Cryptocurrencies, like Bitcoin, offer both short-term and long-term investment opportunities. Some people like to buy and sell quickly, taking advantage of the ups and downs in prices. Others prefer to buy and hold onto their crypto for years, believing in its long-term value. Think of it like some folks preferring to jump in and out of a bustling market, while others buy a piece of land, hoping it will be worth more in the future.
When deciding how much crypto to buy or which ones to choose, it’s essential to think about how much risk you’re comfortable taking. Just as you wouldn’t put all your money into one type of investment, it’s wise to spread your crypto investments across different coins.
But here’s an exciting thing: even big financial experts see the potential in cryptocurrencies. Larry Fink, the CEO of BlackRock, one of the world’s largest investment companies, shared his views, saying, “If you look at the value of our dollar, how it depreciated in the last two months and how much it appreciated over the last five years … an international crypto product can really transcend that.” He added, “That’s why we believe there’s great opportunities and that’s why we’re seeing more and more interest. And the interest is broad-based [and] worldwide.”
So, if you’re wondering whether crypto is a good way to increase your net worth, even the top financial minds think it offers exciting possibilities. Now, let’s explore how you can make the most out of these opportunities in the crypto world.
Strategy 1: Long-Term Investment and Diversification
Diversifying crypto assets is a recognized strategy utilized by a segment of investors. This approach involves allocating funds across various digital assets with the intention of mitigating risk.
1. Bitcoin & Ethereum Allocation: Bitcoin and Ethereum are two prominent cryptocurrencies in the market. Bitcoin is often referred to in financial literature as “Sound money”, while Ethereum has been labeled as “Ultrasound money” by some analysts. These designations arise from the observed potential these two cryptocurrencies have exhibited in the context of reserve money.
2. Broad Asset Allocation: An alternative strategy involves diversifying investments more broadly within the cryptocurrency domain. This can include allocations to lesser-known altcoins or sectors such as NFT Art. The intent is to capitalize on a wider spectrum of the crypto industry, thereby accessing a range of market segments.
Strategy 2: Active Trading
Active trading represents a more dynamic investment approach. It entails active management of assets with the aim of capitalizing on market price fluctuations.
1. Technical Analysis: One common tool in this strategy is technical analysis. This involves examining past market data, primarily price and volume, to forecast future price movements. Financial literature suggests that this method relies on identifying patterns and trends in historical data.
2. Candlestick Patterns: Financial analyses often use profitable candlestick patterns as a component of market evaluation. These patterns are derived from the price movements of an asset visualized on a chart. Their significance in the literature is primarily as predictive tools, with specific formations indicating potential market trends or changes.
This article has provided an analytical overview of net worth and its significance in assessing an individual’s financial standing. By subtracting total liabilities from total assets, one can determine net worth as a representative value. The documentation has further detailed methods by which cryptocurrency can influence this value. Two primary strategies were presented: long-term investment with diversification and active trading. Each approach offers distinct mechanisms within the cryptocurrency domain, as evidenced by data and trends in the financial sector. Prominent figures in the financial industry, such as Larry Fink of BlackRock, have acknowledged the potential role of cryptocurrencies. Conclusively, recognizing and appropriately integrating these strategies can be essential for individuals aiming to optimize their net worth in the context of contemporary financial instruments.