Your net worth is a monetary value informing you of the total value of all your financial activity up to a given moment in time.
Your net worth is not an absolute measure of financial health. However all efforts should be made to increase net worth as part of the process of planning for your future.
In basic terms, net worth is a numerical figure – positive or negative – which is the value of all you own if sold, minus all you owe paid off.
It is calculated using your assets and liabilities, below this is explained in detail.
An asset is something you own. This includes a car, a property, jewellery, furniture and other possessions. It also includes positive balances of bank accounts, the values of any stocks and shares, and any other financial investments.
Liabilities are the opposite. These are things you owe. So that includes a mortgage on property, any outstanding contract payments on a car purchase or a car loan, any bank overdrafts or credit card balances and any other outstanding credit.
Pulling your net worth together
Your net worth is, at any given moment, the sum total of your liabilities subtracted from your total assets.
Total Assets – Total Liabilities = Net Worth
By definition, we want the answer to this sum to be a positive figure. If it isn’t, then whilst there’s not necessarily any need to panic, there is work to be done. Put simply, this involves reducing liabilities, increasing assets, or both.
Rachel has the following assets and liabilities.
- Car with a resale value of £3,500
- Flat with a market value of £300,000
- Savings amount of £6,400
Total assets of £309,900
- Mortgage balance of £200,500
- Credit card balance of £2,200
- Current account overdraft of £54
Total liabilities of £202,754
So, Rachel’s net worth can be calculated as £309,900 – £202,754 = £107,146
This can be regarded as good, as it is a positive figure, but a healthy net worth will be determined by many factors: age, stage in life, and so on.
The benefits of reviewing your net worth
It’s all well and good knowing how to calculate your net worth, but what’s the point, right? The benefits are detailed below:
Know where you are and where you want to be
Reviewing your net worth involves you looking into the details of your finances. You are checking the value of your assets and liabilities and measuring them. Doing so helps you think about your position and where you’d like to be.
Makes you more aware of your spending
When you check your net worth you see immediately the result of all your spending, saving and investing activities to date. This can be rather exposing, which is a good thing. You can see whether you have been making good or bad choices and fix them if necessary.
Helps you make better finance-related decisions
As with above, you are immediately aware of the decisions you’ve made to date. You are now better placed to review where you’d like to be and take time to make better decisions, that are in line with where you’d like to be in the future.
Makes you more likely to achieve your financial goals
As you are now regularly reviewing your net worth, you are thinking about where you’d like to be and the decisions you need to make to get there – you are much more likely to achieve your financial goals. You are actively taking steps to achieve the financial freedom that you seek.
Your net worth will naturally change over time. Ideally, it will increase to provide support later in life. If your net worth is low or negative, don’t bury your head. Instead take action to improve.
Doing something like seeking a pay rise, picking up a side hustle or investing in dividend paying stock to generate a positive income will improve your assets. If you need to work on your liabilities, focusing on paying off your debts will definitely help.
Your net worth should be reviewed regularly, not least to keep abreast of its fluctuation. Personally, I review mine on a monthly basis and take note of areas requiring focus. Acting accordingly will improve the value and, once that starts happening, you’ll soon get to a point where you can’t wait to calculate it.
Whether you want to calculate your net worth by hand, use a spreadsheet or an app, you now know how, so get cracking! To help you along, download a free copy of our Net Worth calculator here.
Did you know that calculating your net worth should form part of a wider financial review? Check out this articles to get the down low of what a financial review is!
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