Many people don’t understand how vital knowing and tracking their Net Worth is to successful money management. In the Smart Money Method, we calculate a person or couple’s Net Worth early on in our process. This gives a starting point, or an anchoring point, from which to strive to improve month upon month. But what exactly is Net Worth?
In very simple terms, your net worth is the difference between what you OWN and what you OWE.
To calculate your personal net worth, you simply add up everything you own and assign an approximate value to it. We teach that the value assigned to your goods doesn’t need to be super accurate as market forces upon a sale of that asset may well differ from your expectation. But you’ll have a rough idea of its market value today — this is the number you should use. Once you’ve completed this step, add them together to give you a total of what you own — these are called your assets.
Next, add up every debt you have using their current outstanding balances. Once totaled up, this gives you a total of what you owe — your liabilities as they are called.
Finally, deduct your owed number from your owned number — this is now your Net Worth as at today’s date.
Another way of thinking about one’s net worth is to consider if you were forced to repay all your debts overnight, how much of your stuff would remain. This is yours to keep.
And let’s say your mortgage is currently $300,000, your car loan is $10,000, and a credit card balance is $5,000 – this gives a total debt of $315,000.
In this example, your net worth would be calculated as $650,000… what you own… less $315,000… what you owe today.
Therefore $650,000 – $315,000 = $335,000 – this is your NET WORTH.
It really is that simple. And this is a number you (or you and your partner) should always have on hand.
Calculating your net worth monthly is important as it gives you a good indicator if you are actually getting ahead in life (or moving toward financial independence) or if you are going backwards financially. While it’s not always possible to improve or increase your net worth every single month (as life’s inevitable storms will come and go and occasionally batter your financial house) it is an ideal to work toward.
Also, bear in mind that at the outset of our process many Smart Money Method™ clients’ net worth often falls initially as they tackle putting an effective budget in place and then paying down debt in earnest.
It’s also very important to remember your net worth is a financial marker only and is not to be confused with a person’s life worth which, in our view, often has little to do with how much money or stuff a person has accumulated to that point in their lives.
Interestingly, it’s very possible to be on a high income and still have a low net worth, especially if everything earned gets immediately spent and there’s nothing to show for it. And, in our experience, many people that outwardly appear well-off or wealthy, have a low net worth as the big houses, flash cars, boats and vacations are all funded by debt, especially in these days of low mortgage interest rates. So, remember, looks can be deceiving!
We hope you will now determine your net worth, along with your partner, and strive to increase that number next month.
