Exploring Financial Literacy 10 Copyright Goodheart-Willcox Co., Inc. May not be reproduced or posted to a publicly accessible website. You Do the Math | 1-1 If your total assets are $3,940 and your total liabilities are $1,232, what is your net worth? Assets Liabilities Net worth Where do you want to be financially in twenty or thirty years? Do you want to be on your way to becoming a millionaire, or already a millionaire? What determines if a person is a millionaire? Is it having $1 million or more in the bank? Not necessarily. An individual may have money in a bank and other assets that total $1 million or more. However, to be a millionaire, a person must have a net worth of $1 million or more, not just $1 million in assets. To give you an example, if you own a house worth $1 million, does that make you a millionaire? Not if you have a $900,000 mortgage on it! Many people who earn large salaries or make money from investments never become millionaires because they incur a large amount of debt or spend everything they make. Some highly paid sports stars, lottery winners, and famous actors end up broke in later years because they did not have a financial plan. Building wealth is not as difficult as you may think. However, it does not happen overnight and is rarely a matter of luck. It requires careful planning and wise decision-making, and is possible even with a moderate income. Right now, you may not be thinking beyond going to college or getting your first job. However, teens and young adults have a great advantage in their ability to build wealth. That advantage is youth. Time is on your side. Check Your Understanding How is it possible to have a large amount of assets but only a modest net worth? __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ Ideally, the older you are, the more your net worth should be. Your assets should increase while your liabilities decrease. A general guideline to strive for is as follows: 10% × your age × your annual income after taxes = net worth. F F Y I