When I was younger I would spend lots of time looking at different countries “Rich Lists” to see what the latest net worth of each country’s richest people.
Only this week the latest list for Australia was released. There have been some big gains in the last 12 months for some at the top of the list. Sadly there were only 19 women in the top 200.
While looking at the list I realised that I have been talking a lot about financial freedom lately and building your wealth generator, but hadn’t spent any time explaining what exactly is your net worth and how do you calculate it…
And it is a well-known fact that a great way to get better at something is to start tracking it.
So let’s change that immediately…
What is Net Worth?
Simply put, the formula for your net worth is:
Your total assets (what you own) minus your total liabilities (what you owe)
Yes there is some maths in money, but none of that crazy algebra stuff…
The key is to make sure you spend the time required to identify everything that can form a part of what you own, and of course, what you owe.
So it is a bit more complex than just how much money you have in the bank. However, for most people, that’s a good thing, right?
Some of the things that you will include in your assets are cash from your bank accounts, investments, real estate, cars, jewellery and collectibles.
The things you owe might include your mortgage, credit card and store card balances, investment loans, student loans and tax debt.
These are the most common items, but you may have more or different items. Just ensure that they are either worth something if you include them in assets.
The Controversial Discussion
You may have noticed one reasonably significant item that I omitted from the list of assets…
There is a lot of debate about this item and whether it should or shouldn’t be in your assets.
Do you know what it is? If you said your home then gold star for you.
Surprisingly there is much debate about whether your home should be included as an asset.
The two arguments pretty much, in simple terms go like this:
- The home is not an asset because it costs money to maintain. This is things like repairs, maintenance, utilities and other random costs.
- The second argument is that if you are going to include your mortgage in the calculation, then it is only reasonable that you include the home as an asset.
Where do I sit in the discussion? I’m in the camp that include it in the calculation. Oh, I can hear the hissing already…
My view is that you’ve worked hard to be able to buy a home and the equity you have built up should form a part of your net worth. The equity is just the difference between the home’s value and the amount of your mortgage.
The Benefits of Knowing Your Net Worth
Have you ever heard the saying that if you don’t know where you are going you will probably get there?
It is the same with money. If you have the goal of being financially free, what are you going to use to determine when you are there, and more importantly, how are you going to monitor your progress.
That’s where the net worth calculation comes in…
The benefits of knowing your net worth include:
Knowledge is power. Instead of living in ignorance, you will know the truth. Your net worth will bring clarity to your financial life.
Motivation. I guarantee you, that when you start tracking your net worth you will want to see it improve. This is where money mindset kicks in and your brain starts to think of ways to improve your number. While you sleep, you will be thinking of ways to grow your net worth. Over time, this will have a profound positive effect on the number.
Set a specific goal. Knowing what you are tracking will enable you to set specific goals to improve your net worth over time. When you know where you want to go, the pathway becomes a lot clearer.
What Should Your Net Worth Be?
The bigger the better I say…
No seriously, the fact is that everybody’s ideal number will be different. I encourage instead that you determine what your number needs to be to provide you the financial freedom you desire.
Once you have this number, the important next step is to make sure you are taking steps to move your current net worth toward your desired number.
Another key part is to avoid comparing yourself to others. Everybody in your life will have their own circumstances; none of us is the same. Comparison can be a real motivation killer if you are not careful.
Understand your current net worth, where you want to go, and enjoy the journey.
Leave me a comment below and let me know what step you have taken to learn your net worth.