Have you ever felt like your finances are completely out of control? Don’t know whether you’re coming or going with your money and get anxiety about it?
A potential answer to your problems: start tracking your net worth.
What is net worth?
“Net worth” is another way of saying “this is how much money I would have if I sold everything I own and repaid everything I owe”. It is your northern star when it comes to your financial position. It’s your personal balance sheet - a snapshot of your economic clout at any point in time.
Net worth isn’t just a term that “rich” people should be using either, everyone can benefit from using this personal finance metric to get more clarity on their finances and be more methodical about managing them. What are the advantages of tracking your net worth?
I’ve tracked my net worth for years. It’s a financial metric I check in on regularly because it helps keeps me focused and is a really motivating way to see your wealth and financial position continue to improve over time. That age old saying comes into pay here: what you measure, gets managed.
Measuring your net worth has many benefits, such as:
seeing your overall financial picture all in one place
keeping track of progress towards meaningful financial goals
making rational decisions about your money and how to allocate it
maintaining a sense of control over your finances (helping keep any anxiety at bay!)
better managing cash flow
How do you calculate net worth? To calculate your net worth, you’ll need to know what all of your assets and liabilities are worth. Because the value of assets and liabilities fluctuate over time, so too will your net worth.
Assets are anything valuable that you own which could be turned into cash, including: cash, savings accounts, retirement accounts, investment accounts, stocks and shares, property, high value items like art, jewelry and vintage cars.
Liabilities are anything that you own which cost you money and includes personal loans, credit card debt, mortgages, cars on finance.
Calculating your net worth is really simple:
Make a list of all of your assets and what they’re worth
Make a list of all of your liabilities and what they’re worth
Subtract your liabilities from your assets total the number you’re left with is your net worth
If your net worth figure is positive, it means you own more than what you owe out - so if you sold everything and repaid all of your debts, you would have money in the bank.
The opposite is true if your net worth figure is negative – that means you owe more than what you own. If you sold everything to repay your debts, you would not repay them in full and would still owe money.
Ideally, you want your net worth to be positive. How positive and how big of a financial base you want to feel comfortable and financially secure is up to you. The actual number isn’t important and will vary from person to person, what is important is that you have a number in mind to aim for.
For example, one person might aspire to have a net worth of £100,000 and someone else might aspire to have a net worth of £100,000,000 – both of these are perfectly acceptable and there’s no right or wrong answer.
What if you’re net worth is negative….
Here’s an important message: whatever your net worth figure is, do not attach this to your actual worth as a person. It is just a number which can be used as a measure of financial progress. You are not your net worth, just like you are not your weight, you are not your height and you are not any other quantitative measure. Your net worth should not matter to anyone else but you. Nobody needs to know what it is and you shouldn’t compare your net worth to anyone else’s.
So, if you’ve calculated your net worth and it’s negative, don’t panic.
Most people will have a negative net worth at some point in their life. For example, if you’re a student just out of university with student loans or if you’ve gotten yourself into a lot of consumer debt and have no assets your net worth is likely to be negative. This isn’t an ideal scenario, but it isn’t the end of the world either.
There are so many steps you can take to get yourself out of a negative net worth value and on the way to wealth creation (we’ll explore this in future articles). The first step to change is awareness, and getting clarity on your current financial position by calculating your net worth is one way to start gaining that awareness.
Also think of it like this: it’s better to know that you have a negative net worth than to not know what your net worth is at all. At least you know what your starting point is in moving your financial needle in the right direction.
To repeat – do not panic if you have a negative net worth! Your first goal will simply be to get it back to zero and then work on building your wealth from there. Instagram: @classhouse_money Pinterest: @classhouse_money
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