In one of his most prominent roles, Nicolas Cage stole the Declaration of Independence as Benjamin Gates in National Treasure. At the peak of his acting career, he was one of the highest-paid actors, making $20 million for starring in movies, and had amassed a net worth of $150 million; however, that wealth did not last long.
How do we know how wealthy we are?
One way of measuring someone's wealth is by looking at their net worth.
We build up our net worth by increasing how much we own and/or decreasing how much we owe. Cage's net worth of $150 million meant that the value of the things he possessed was $150 million more than what he owed. If we owe more than we own, our net worth will be negative.
Knowing our net worth gives us a snapshot of our financial circumstances, allowing us to set more realistic investment goals. Tracking changes over time will tell us if we are making sound investment decisions and progressing toward our financial goals.
Doing all this can prevent us from making mistakes, like spending or borrowing too much, that could eventually lead to bankruptcy or financial ruin.
What do we own?
Figuring out our net worth starts by tallying up our assets, what we own.
These are our possessions that have value. Some examples would be our homes, cars, cash, savings accounts, and any investments.
What do we owe?
The next step is to subtract our liabilities, or what we owe.
These are debts we need to pay back. The mortgage we took out to buy our home, the car loan we needed to purchase that ride, and the credit card debt we racked up eating out at restaurants are all examples of our liabilities.
Let's look at some of the wealthiest people in the world, the billionaires. Someone like Jeff Bezos, the founder of Amazon, had a growing net worth above $180 BILLION at the end of 2020, over 1,000 times richer than Nicolas Cage was at his peak.
There is no way Bezos had $180 billion in cash on hand. Most of his wealth was tied to the 55.5 million shares of Amazon stock he owned. This means his net worth moves up and down with the stock price.
A common misconception is that having a high income or having nice things makes a person wealthy. Spending all of the money we make doesn't leave room to build wealth with. Plus, what if we buy those things by borrowing all of the money to pay for them?
It doesn’t help to own lots of expensive stuff if we owe lots of money. In fact, our net worth usually goes down if we take on large amounts of debt because of interest, the cost of borrowing.
There are many unfortunate examples of athletes, celebrities, and investors who went from being fabulously rich to desperately broke because they mismanaged their wealth.
Keeping track of your net worth over time will keep you on track to reach your goals and make sound investment decisions. In addition, it gives you feedback about your financial security and if you are becoming wealthier.