WTF Is Net Worth?

The first article in our WTF series outlined the basics of making a financial plan. Now we�re delving into each step in more detail. This article explores the concept of net worth � and how you can build it.   When most people hear �net worth�, they probably think of international real estate, being on a boat and the Forbes Billionaires List. Speaking of boats, the phrase probably means something different altogether to fishermen. But in reality, like brains, opinions and a latent mortality, a net worth is something we all have � yacht or not.   In a nutshell, your net worth is the difference between everything you own (your assets) and everything you owe (your liabilities). Your assets include things like money in the bank, investments, property, cars, shares in a business, jewellery and art. Your liabilities include stuff like your outstanding credit card balance, student loans, mortgages, car lease payments, rent and bills. Your assets minus your liabilities equals your net worth. Simple as that.   Why Should I Care?   Think of your net worth as a financial report card. It can show you how you�re doing at a particular moment in time, providing either a bit of a wake-up call (what retirement savings?!) or else a feel-good pat on the back (everything�s comin� up Milhouse!!). It will affect your ability to achieve your financial goals: if you want to retire early or get a mortgage, that�s going to be tough if you owe a lot of money (and have a low, or negative, net worth).   Going through the process of identifying each of your assets and liabilities also lets you reflect on which ones are most helpful or harmful, and whether you are too dependent on one asset. Ultimately, tracking your net worth over time helps you assess whether you�re heading in the right direction when it comes to your finances. Got it? What are you waiting for � calculate your net worth right here (make a copy of the spreadsheet if it doesn’t let you edit).   One more thing: keep in mind that this figure misses some important considerations that also affect your financial health, but are difficult to stick a number on. Your most valuable asset may be your ability to earn an income, which is influenced by your skills and experience, among other things. Plus, your liabilities can change dramatically over time, depending on your personal goals: for example, your children�s college tuition fees may be the biggest expense you ever have to plan for. Unless, that is, you really want that mega yacht.   What Can I Do?  

• First, work out your current net worth using our free calculator (make a copy of the spreadsheet if it doesn’t let you edit).
• Invest savings and any spare income in productive investments (like property, stocks or bonds) to increase your assets. There are a range of ways to do this � some platforms let you invest jointly with others in property, for instance.
• Reduce debt in general, and bad debt (like credit cards and payday loans) in particular, to reduce your liabilities.
• Cut your living expenses (e.g. by switching to cheaper utility providers or finding somewhere with cheaper rent) to increase your savings, and thus your assets.
• Build up your professional skills (e.g. by getting a new qualification), which should help you earn more money � the younger you are, the more important this is, since you�ve got many years of work ahead, we�re afraid.
• In addition to current debts and living costs, factor in expected major expenses in future � like taking care of kids or aged �rents � when assessing your financial health.

The first article in our WTF series outlined the basics of making a financial plan. Now we�re delving into each step in more detail. This article explores the concept of net worth � and how you can build it.

 

When most people hear �net worth�, they probably think of international real estate, being on a boat and the Forbes Billionaires List. Speaking of boats, the phrase probably means something different altogether to fishermen. But in reality, like brains, opinions and a latent mortality, a net worth is something we all have � yacht or not.

 

In a nutshell, your net worth is the difference between everything you own (your assets) and everything you owe (your liabilities). Your assets include things like money in the bank, investments, property, cars, shares in a business, jewellery and art. Your liabilities include stuff like your outstanding credit card balance, student loans, mortgages, car lease payments, rent and bills. Your assets minus your liabilities equals your net worth. Simple as that.

 

Why Should I Care?

 

Think of your net worth as a financial report card. It can show you how you�re doing at a particular moment in time, providing either a bit of a wake-up call (what retirement savings?!) or else a feel-good pat on the back (everything�s comin� up Milhouse!!). It will affect your ability to achieve your financial goals: if you want to retire early or get a mortgage, that�s going to be tough if you owe a lot of money (and have a low, or negative, net worth).

 

Going through the process of identifying each of your assets and liabilities also lets you reflect on which ones are most helpful or harmful, and whether you are too dependent on one asset. Ultimately, tracking your net worth over time helps you assess whether you�re heading in the right direction when it comes to your finances. Got it? What are you waiting for � calculate your net worth right here (make a copy of the spreadsheet if it doesn’t let you edit).

 

One more thing: keep in mind that this figure misses some important considerations that also affect your financial health, but are difficult to stick a number on. Your most valuable asset may be your ability to earn an income, which is influenced by your skills and experience, among other things. Plus, your liabilities can change dramatically over time, depending on your personal goals: for example, your children�s college tuition fees may be the biggest expense you ever have to plan for. Unless, that is, you really want that mega yacht.

 

What Can I Do?

 

• First, work out your current net worth using our free calculator (make a copy of the spreadsheet if it doesn’t let you edit).
• Invest savings and any spare income in productive investments (like property, stocks or bonds) to increase your assets. There are a range of ways to do this � some platforms let you invest jointly with others in property, for instance.
• Reduce debt in general, and bad debt (like credit cards and payday loans) in particular, to reduce your liabilities.
• Cut your living expenses (e.g. by switching to cheaper utility providers or finding somewhere with cheaper rent) to increase your savings, and thus your assets.
• Build up your professional skills (e.g. by getting a new qualification), which should help you earn more money � the younger you are, the more important this is, since you�ve got many years of work ahead, we�re afraid.
• In addition to current debts and living costs, factor in expected major expenses in future � like taking care of kids or aged �rents � when assessing your financial health.