What is your Net Worth?
It simply represents a snapshot in time of how much you are worth in monetary terms. In short your financial health or net economic position.
It is also a great indicator of how well you manage your Personal Finances.
Net Worth = Assets - Liabilities
Simple Example:
Assume you have 5000 in the bank and debt of 3000.
Net Worth = 5000 – 3000 = 2000
Swapping these two numbers around reveals a negative net worth where your liabilities are greater than your assets. You owe more than you have.
Net Worth = 3000 – 5000 = -2000
Don’t beat yourself up if yours is negative. Just by knowing your number you are ahead of the pack and can use that information to make adjustments to achieve your goals,
When repeating this calculation periodically you effectively create your own financial report card that you can use to track your progress.
The Components
Assets
Assets are things that you own like cash, shares, property, pension funds, etc.
Liabilities
Liabilities are things that you owe like home loans, credit card debt, store accounts, etc.
Net Worth
Net Worth = Assets less Liabilities
Drawdown
Drawdown is the funds you use from your asset base to finance your expenses during retirement.
The Importance
Ready to retire or stop working 9 to 5 for a living?
In order for you to do that you need a big pot of assets that you can tap into to pay for the expenses of your chosen lifestyle. This is called drawdown. Optimally you would like to have sufficient returns on your assets so that you can pay for your expenses without depleting your asset base. This way you will highly likely never run out of funds.
When your asset returns cover your expenses your are financially free which is often referred to as:
Financial Freedom
or
Financial Independence
Repeat the Net Worth calculation at least once per year to determine if you are on the right path.
Is it growing fast enough to achieve your goals? Are changes in your strategy needed?
How do you control your
Net Worth?
Assets & Liabilities form the basis of your net worth. What should you do?
The best way to do this initially is to create a budget to identify where you are spending your money. Can you contribute more to investments and savings?
This process will shed light on any potential financial leaks like subscriptions that are no longer needed, etc. These extra funds can then be invested.
Look at your existing investments and check what costs are charged to maintain them. This can have a devastating impact on performance. Addressing this will immediately let your assets grow faster.
Determine if you are getting optimal investment returns. Is your portfolio properly positioned? You might want to get help on this.
As mentioned above, look at investment charges you are incurring. Often these can be reduced.
Look for things like Total Cost (TC), Total Expense Ratio (TER), etc. in the fine print of your investment.
Once again budgeting is your first step to understand where you are spending your money.
Start by plugging any financial leaks
Pay off debt as quickly as possible. This is a wealth building killer.
In a perfect world you would manage to do all three at the same time to speed things up dramatically.
Bigger is better!
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