Your net worth is a key measurement in your financial plan. Technically speaking if you were to sell everything you own and pay off everything you owe the amount left over is your worth.

It is easy to be lulled into a false sense of worth with assets such as houses and cars. They are the largest purchases that we make in our lives and create the largest debts on our balance sheets. No problem if you can comfortably afford the debt. Comfortably means that at the beginning of every month you have set aside a portion of your income for savings and then have still have enough money to pay the instalments even if interest rates go up by a few percentage points.

Just as a company manages its business with a balance sheet we should with a pen and paper create our own personal balance sheet. Simply make two columns – one for assets (things you own) and one for your liabilities (things you owe). The difference in the totals of these is your net worth. The bigger the difference the better off you are.

Measuring your net worth from time to time will give you a clearer picture of how you are growing financially. Your balance sheet will also give yo a snap shot of where your opportunities lie in allocating your income. For example, it could show that paying more into your bond could benefit you by reducing your liabilities column and at the same time creating accessibility to cash for emergencies.

Your path to financial freedom is investing over the longest possible time taking full advantage of compound interest. The more you save over time in assets which beat inflation the wealthier you will become as the magic of interest on interest takes its course. Getting your debts behind you as quickly as possible will free up more money for savings. Instead of paying interest to the bank you start to compound your own interest which increases your net worth. Your net worth forms an important base for your financial plan. Measure it often to really understand if your worth is growing.