January 16, 2018 Calculating your net worth and why it’s so important
Everyone has a net worth.
Whether you’re a small business owner or CEO of a blue-chip company, each and every one of us has a dollar value on paper.
Small or large, the only difference is what that number is.
Knowing your net worth is a necessity, in my opinion.
In fact, I’d argue it’s the most important number you need to know when it comes to your financial situation.
For me, not only does it provide a snapshot of your financial situation, knowing your net worth allows you to start building the right foundation to achieve your financial goals and, ultimately, it plays a vital role in working towards becoming financially independent.
The good news is that calculating it is super easy.
Working it out
Calculating your net worth is a relatively simple equation.
Think of it like this:
Assets – liabilities = your net worth. Simple, right?
Unless you have a complex financial structure – and I’m not talking shell companies in the Cayman Islands or Bermuda – it’s a pretty straightforward calculation for your average person. Ultimately, it’s a case of deducing whether your total assets trump your total debts.
While you’ll find a wealth of ‘net worth’ calculators scattered around the Internet – some basic, some much more comprehensive – the Money Smart calculator is a great place to start. It’s a relatively painless exercise and should take you all of five minutes to complete.
Understanding what’s what
First, let’s look at the textbook definitions.
An ‘asset’ has to have some kind of monetary value. It can either be liquid or physical.
Liquid assets would include, say, savings accounts, investments, superannuation and the like.
Physical assets are pretty self-explanatory. We’re talking property, valuables, vehicles, etc, bearing in mind the ongoing depreciation on the latter, unless you have a penchant for, say, rare, collectable cars.
The question to ask yourself is: Could I liquidate this asset and invest the money in something else? If the answer is yes, then you’d class that as an asset.
Liabilities are pretty straightforward, too. We’re talking any money that you owe, whether that’s to the bank, family or friends, or store cards, for instance.
Your line in the sand
As an exercise, calculating your net worth is the perfect starting point for a financial health check.
In my experience, for most people, doing the exercise itself is often more important than the resulting dollar value.
For me, your net worth provides the perfect benchmarking tool, particularly if you’re clear on what your financial goals are, like sending your kids to a certain school or the lifestyle you want to lead.
Think of it as a snapshot of where you’re at right now, financially. I’d also suggest doing the exercise once a year and benchmarking how you’re travelling against the goals you’ve set yourself.
Okay, let’s assume you’ve calculated your net worth and you’ve arrived at your magic number.
It’s time to start prioritising what you need to do to bridge the gap between your current net worth and what you want to achieve over, say, the next five years.
The first thing I’ll say is this: if your net worth isn’t that rosy, the important thing to focus on is the bigger picture.
If your liabilities do outweigh your assets, that’s what getting professional financial advice is all about, right?
Here, having a clear-cut roadmap to help get you on track and on the way to realising your goals is everything.
This is what we’re all ultimately working towards, right?
Whether you’re still a way off or well on the way, keeping tabs on your net worth each acts as a barometer for how you’re tracking.
If you need help working out your current financial position and some guidance around working towards any financial goals you may have, as always, feel free to give me a shout.
Disclaimer: all information contained within this article is of a general nature. It does not take into consideration your personal financial circumstances. Please consult a professional financial adviser (just like us 🙂 ) when making a financial decision.