Understanding your personal net worth is a fundamental aspect of financial literacy.
There is a common misconception that net worth tracking is only for celebrities and rich people. I used to believe that as well.
This blog post will define what net worth is. It will speak on the difference between assets and liabilities. Moreover, it will show you how to calculate your net worth and provide methods you can use to increase it.
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Net Worth Meaning
Net worth is the figure that is left after the value of your assets is subtracted from the value of your liabilities.
It provides a snapshot of your financial health and provides vital information about the overall state of your finances.
You can increase it by accumulating assets. This method is employed by wealthy people in order to continually increase their net worth.
In the book, Rich Dad Poor Dad, Robert Kiyosaki said that the rich are always focused on acquiring more assets. Whereas everyone else is focused on acquiring liabilities.
Assets Vs Liabilities
Assets are anything that you own that can be utilized to value. You should aim to maximise your assets at all times.
Assets come in a variety of forms. Here are some examples:
- Business properties
- Personal properties
- Boats and Cars
- Art and jewelry
- Bonds, Stocks and Pensions
- Royalties from Intellectual Property
Liabilities are defined as the debts you owe to a person or business.
Examples of Liabilities include:
- Car loans
- Student loans
- Credit card balances, if not paid in full each month.
- Mortgages
- Secured personal loans.
- Unsecured personal loans.
- Payday loans.
Net Worth and Materialism
Material possessions are not an indicator of net worth. A good example of this is the story of Ronal Read, who was a janitor. Ronald died aged 92 and he left behind a $8 million fortune.
He had quietly accumulated wealth for over 40 years. He did this by investing in stocks. His loved ones were shocked he had so much money and they described his existence as “humbe”.
To the outside world, he looked like any other person. He drove second hand cars and consistently lived below his means.
Ronald Read demonstrated that you don’t have to be flashy, drive the latest car or live in the biggest house in order for his worth to be high.
In fact, people who place a high value on material possessions experience more negative emotions and are less satisfied with their lives.
Net Worth Formula
To calculate your it, use the following formula:
Assets – Liabilities = Net Worth
Example Calculation:
Tim and Claire have a house that is worth £200,000. They have £15,000 in cash savings, alongside £15,000 in investments. Both their pensions combined are worth £20,000.
However, their mortgage has £80,000 left on it. Moreover, they have £5000 worth of credit card debt and they recently took out a £10,000 loan to renovate their home. They also have combined student loan debt of £27,000. Their total net worth is £122,000
Assets:
House Value £200,000
Savings of £15,000
Pension of £20,000
Investments of £10,000
Total Assets = £245,000
Liabilities:
Mortgage: £80,000
Credit cards: £5,000
Personal Loan: £10,000
Student Loans: £27,000
Total Liabilities = £123,000
Net Worth = £122,000
How to Improve Your Net Worth
There are several things you can do to increase it.
Firstly, you should pay off all debts. There are several methods and ways to become debt-free.
Secondly, you can increase your cash flow. You can do this by starting a side hustle, asking for a pay rise or selling items online.
Thirdly, you should save money consistently. This article highlights 8 simple ways you can start saving money.
Fourth, you should regularly invest in stocks and shares. Some people are hesitant to Invest in the stock market because of the risks involved. But the stock market has consistently had higher returns than regular savings accounts.
Lastly, focus on consistently acquiring assets that appreciate in value.
Conclusion
Calculating and understanding your net worth is a vital element of personal finance. There are several, practical ways in which it can be increased. The key to having a higher number is by limiting liabilities and consistently acquiring assets.
Do you calculate your net worth? Do you feel it’s an important aspect of your personal finance? Let me know!
