Before we get going, let's define some terms that we'll use later.
An asset is anything you own that has value! Assets contribute positively to your net worth and your overall wealth.
These could include:
You can read more about assets on Investopedia here.
A liability is anything that you owe money on. These detract from your net worth and overall wealth.
These could include:
Liabilities can be devastatingly expensive with high interest rates, or a smart decision that allows you to pursue an opportunity you wouldn't be able to otherwise. We'll discuss more about how to decide what liabilities to hold and how to get rid of ones that are hurting your overall wealth.
You can read more about liabilities on Investopedia here.
"Net Worth" is a measure of your overall wealth. It is simply the value of your assets, minus the value of your liabilities.
For example, if you have assets of $10,000 in cash, a house worth $100,000, and a mortgage worth $50,000, your net worth is $60,000.
Do you remember when you could buy a new car in the US for $3,000? Or a candy bar cost $0.10? Or if you're not old enough to remember that, do you know someone who does?
A big part of the reason for that is inflation!
Inflation is a loss in value of currency that occurs as prices rise. This is the reason why a dollar today buys less than a dollar did years ago. Inflation can be good or bad, but some inflation is normal and a necessary part of a healthy economy.
You can see the inflation rate each year for the US from 1960 to 2019 below:
The inflation rate fluctuated over time, particularly in the 1970s and early 1980s, but has stayed much lower since. In fact, in 2012, the US announced it intended to develop its policy to try to keep the inflation rate averaging 2% over time.[1]
This is important to think about in your finances, because as the world around you gets 2% more expensive each year, you need to grow your money and income at at least that rate to keep up.