I’m a Financial Expert: Here’s When Your Net Worth Matters Most
A person’s wealth is often defined by the value of his assets — but assets only tell half of a person’s financial story. A better way to measure a person’s wealth is by their net worth.
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“Net worth is a crucial financial metric that captures the total value of an individual’s assets minus their liabilities, offering a comprehensive snapshot of their financial health,” explained Michael Hills III, financial advisor with Apex Wealth. “It matters most in scenarios where financial stability, risk, and potential for future income need to be assessed. This could be during events that require significant financial decisions or where the financial risks are high. Net worth serves as a key indicator of one’s ability to meet financial obligations and commitments, sustain their lifestyle and absorb financial shocks.”
Here are just a few instances when knowing your net worth can be beneficial to you.
When Applying For a Loan
Knowing your net worth can help understand whether you appear to be a poor risk to lenders.
“Lenders want to loan money to individuals who are likely to pay back the loan in full and on time,” Hills said. “If you owe significantly more than you own, lenders will be reluctant to loan you money. This is because lenders will see you as a higher risk of defaulting on your payments.”
When Purchasing Umbrella Insurance
Umbrella insurance provides additional liability coverage above the limits of homeowner, auto or other insurance policies. When you know your net worth, you are more likely to purchase the appropriate umbrella insurance policy.
“Net worth matters when purchasing umbrella insurance because the amount of coverage needed often depends on the individual’s assets,” Hills said. “High net worth individuals typically require more extensive coverage to protect their assets against potential lawsuits or claims.”
Discover More: Net Worth for US Families: How To Tell if You’re Poor, Middle Class, Upper Middle Class or Rich
When Drafting a Prenuptial Agreement
When you have a clear picture of your net worth, you know what your physical assets are. You also know their value. This can be incredibly helpful when drafting a prenuptial agreement.
“In the context of drafting a prenuptial agreement,” Hills explained, “an individual’s net worth is crucial as it influences the terms regarding the division of assets and financial arrangements in the event of a divorce. Accurate disclosure of net worth ensures fair and legally binding agreements.”
When Dealing With Market Fluctuations in Retirement
“For retirees, net worth is particularly important during market fluctuations,” Hills said. “A solid net worth provides a buffer against drops in the market, allowing retirees to maintain their lifestyle without needing to liquidate investments at a loss.”
Knowing your net worth can also help you determine how much you can continue to safely withdraw. For example, say you are taking 5% out of your 401(k) annually during retirement. If you have $1 million saved, that’s $50,000. If the funds in your 401(k) crash to 50%, your 401(k) is suddenly worth just $500,000. If you stick to withdrawing $50,000 yearly, you will deplete your account in just 10 years.
When You Need To Sell Assets Quickly
“In situations where there is a need to liquidate assets quickly, perhaps due to a financial emergency, knowing one’s net worth helps in making informed decisions about which assets to sell to cover needs without compromising financial stability,” Hills explained.
Illiquid money might be hard to obtain quickly because it is invested in real estate or a business. But liquid assets like cash, retirement funds, trusts or antiques can be easily accessed in a pinch (for the most part).
When You Want Access to Sophisticated Investment Opportunities
Some investments are only accessible by individuals with higher net worths. For example, Hills explained that the amount of your net worth is significant when seeking access to sophisticated investment opportunities like hedge funds, private equity or capital funds.
“These investments often have high minimum net worth requirements because they carry higher risks and longer investment horizons, making them suitable primarily for those with substantial assets and financial resilience,” Hills said.
Peter Brennan contributed to the reporting for this article.
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