I have always thought knowing my net worth was important as it’s an accurate view of all my money decisions combined into one positive or negative number. In spite of this, I never really tried to calculate my net worth for two reasons, firstly I wasn’t too sure of what actually counted as an addition or subtraction, and secondly, I really did not want to be given a negative net worth.
However, as part of educating myself, I have consistently come across mention of ‘net worth’, how it impacts investment decisions, how it predicts your readiness for retirement etc, and I have finally decided to calculate my net worth irrespective of the outcome.
Wealth is a mindset; so is poverty, what you know or don’t know, your perspective of life and beliefs have a direct connection to your net worth .
What Is Your Net Worth?
Net worth is your financial position at a point in time. It is a measure of what you own minus all that you owe.
In my case, it is my financial report card as at 31st December 2021.
What Are The Common Misconceptions About Your Net Worth
There were two main misconceptions I had about my net worth before I educated myself. It is very important to know this to set the right foundation.
1. Your Net Worth Is Not Your Income
It turns out that because your income has increased does not exactly correlate with an increase in your net worth.
It is infact possible to have a significantly less net worth than someone who earns half of what you earn if they use and manage their money better. A higher salary should help with your net worth, but that is only applicable if you use your salary wisely and use your money to make money.
2. Your Net Worth Isn’t Made Up of Just The Things You Own
Congratulations you own beautiful things – you own properties, the latest BMW car, jewellery, painting etc. If you have so much more tied up in debt, loans, and mortgages then you might just be broke!
Is Your House Part of Your Net Worth?
This brings us to the next question ‘Is the current market value of my house part of my net worth?
Well, it depends and to explain that I’ll paint two scenarios:
Scenario A: You own it all and have no mortgage. You purchased your house for £375,000, it has now increased in value and is now worth £430,000. You have no mortgage on it so it contributes £430,000 to your net worth.
Scenario B: You have some mortgage. You purchased your house for £375,000, you have so far paid £100,000. You have £275,000 left to pay off your mortgage. It has now increased in value and is now worth £430,000.
Your net worth in that property is the £100,000 you have contributed + the appreciation in equity which is all yours i.e. £430,000 – £375,000 = £55,000.
Your total net worth in that property is £100,000 + £55,000 = £155,000.
How Do You Calculate Your Net Worth?
If your net worth is the difference between what you own and what you owe, then how do you calculate it?
To calculate your network, you take the total of your asset and subtract the total of your liability.
Asset – Liabilities = Net Worth.
Your asset includes your liquid asset such as your cash and illiquid asset such as the equity you have in your house. If you maximise your employer’s contribution to your pension fund, then congratulations it is included in your net worth and you are taking the right step to increase it.
Your liabilities include your credit card, what’s left on your mortgage, your student loans, and car loans. Anything you owe should be added to your liabilities.
If you owe more than you own you will end up with a negative total net worth.
Why You Need to Know Your Net Worth
There are many reasons why you need to know your net worth, however, the key ones that stick out are;
1. Your Net Worth Shows Where You Are in Your Financial Journey to Freedom
By calculating your net worth, you end up with either a positive or negative net worth. This simple calculation is a good reflection of where you stand.
2. Your Net Worth Helps Idnetify What You Need To Do To Get To Where You Need To Be
Your net worth gives of indication of where you need to be. For example, if you have a negative net worth then at least you know you need to turn that into a positive net worth.
If you find yourself with significantly more liabilities than assets, then you know what needs to be fixed. You can pick the liabilities and come up with strategies to reduce or eliminate them. You can look at your asset and decide if you have too much in cash and need to invest some to increase your assets.
What Do My Numbers Say?
One of the guiding principles of this blog is a 100% transparency. This means I share things as they are and there is no sugar coasting dust to attract or retain readers.
Now to the moment to truth, I off course calculated my network and subtracted all I owe from what I own.
It was indeed a very revealing exercise. I learned a couple of things about my finances including
- That I had £157.16 in a student NatWest account that I had totally forgotten about. I was very gutted to have left money sitting in the bank that was waiting to be wiped out by inflation as that’s really what money in the bank without no strategy does – it gets wiped out by inflation
- That my property has appreciated by over £50,000 dollars in 2.5 years – first time I have checked in a while
As at 31st December 2021, I have close to £240,000 in assets which will be exciting and amazing, except that I also have a little over £280,000 in liabilities, thanks to my mortgage.
I am quite meticulous about spending and investing. I am also quite deliberate about the ‘liabilities’ masked as ‘assets’ that I buy such as my car which I managed to sell this week for a little less than what I bought it two years ago.
How I Plan to Increase My Net Worth in 2022
While I am grateful for how far I have come in my journey and appreciate that debt is not a bad thing and can be used to accumulate wealth. I intend to turn things around and achieve a positive net worth as soon as the half of next year. To do so I intend to’
- Firstly, max out my Isa allowance and invest £20,000 at the very beginning of the next tax year
- And secondly, invest £20,000 in my Self-invested personal pensions (SIPP) and hope the additional boost from the government takes me to a positive net worth.
One thing I will not be doing, and I suggest you also don’t do is try to pay more towards your mortgage to reduce how much you owe on your property. This is particularly true if the interest rate on your mortgage is significantly lower than the percentage you stand to earn by investing your money in opportunities such as those provided by index funds.
I am greatful to have done this exercise at a particularly good time, which is the end of the year. I intend on doing this calculation every quarter and hope that I can turn £100,000 in net worth by this time next year.
I encourage you to calculate your net worth and set clear strategies to improve it in 2022. You can easily calculate your net worth using a simple Microsoft Excel Spreadsheet or by using on of the many good online net worth calculators such as;
Based on your result and stage in life, you should always make a clear action plan to increase your net worth. What is your Net Worth?.
*This is not financial advice. Do not consider this blog to be a substitute for obtaining advice from a qualified investment advisor. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional*
