It’s common to hear about the net worth of billionaires and famous people. Forbes calculates a list of the richest people in the world every year. Take the top 5 in 2019’s list;
- Jeff Bezos– $113.0 billion
- Bill Gates– $107.1 billion
- Bernard Arnault– $106.6 billion
- Warren Buffet -$86.9 billion
- Mark Zuckerberg– $74.9 billion
Those 5 people nearly have $500 billion between them. That’s about 5 times what the New Zealand government spent in 2019 at $93.6 billion. That’s insane.
Reading about these people with their large net worths can make us feel small when we calculate our net worth
But Net worth is arguably one of the most important financial metric for you to measure periodically. It’s the way to measure your financial progress – it gives a glimpse into how far you have come in your financial situation over time.
So, do you know your own net worth? and is it worth knowing?
Dictionary definition of Net Worth
The definition of new worth is the measure of the wealth of a person (or company). It’s defined as the difference between assets and liabilities. It’s an important metric to gauge a person’s financial health and it provides a snapshot of the person’s current financial position.
The definition of net worth might seem quite simple, right. Add up the value of all your debt and subtract it from the value of everything you own. It’s sometimes not that straight forward. Take your car for instance- is it a liability or an asset. Do you use the market value, or what you paid for it when you got it?
How to calculate your Net Worth?
Net worth is your assets minus your liabilities.
Net Worth = Assets – Liabilities
- Add up all of your assets
- Add up all of your liabilities
- Subtract your liabilities from your assets
Assets
An asset is something that is owned by you is useful and has some sort of monetary value. It can be a physical asset such as your car or house, or it can be an intangible asset like owning shares in a company. It’s also money itself- the money in your bank account is an asset.
Add up the value of all your assets, these include things like;
- Bank Accounts
- Savings
- Checking
- Term deposits
- Your Emergency Fund
- Investments
- Kiwisaver
- Share Funds
- Investment Property
- Physical Assets
- Your Home
- Land
- Buildings
- Vehicles
- Jewellery
- Funiture
Liabilities
A liability is something that you owe. Something that you are responsible for paying back over a certain time frame. It’s a deal made between two parties with certain terms and conditions- and if you break those terms and conditions there are consequences. Liabilities are things like loans on vehicle purchases, where you make a deal with the finance company to lend you money to purchase a car.
Add up all your liabilities, these include things like;
- Personal Loans
- Car Loans
- Hire Purchase Loans
- AfterPay balance
- Credit Card debts
- Mortgage
Net Worth = Assets – Liabilities
Now subtract all your liabilities from your assets and there’s your net worth. If it’s positive- you own more than you own. If it’s negative, you owe more than you own.
If you go through your own network calculations and it shows a negative net worth- don’t get too frustrated. You’re not alone. From the 2018 household net worth data from Statistics NZ, 6% of all Kiwi households have a negative net worth. it does mean you owe more than you own, which can be frustrating. But don’t allow that frustration to keep you from completing the net worth calculation in future years and continue tracking your progress. If you don’t track it, you won’t know if your position is improving or going backwards.
What do you include in your Net worth?
There are debates about the finer points of what to include in your assets section when calculating networks that are always debated.
Replacement or market value?
Personally, I don’t like to add household items and jewellery etc into my net worth calculation (not that I own much jewellery or household items). I think of them more as consumables, but over the long term. Sure, you could get a bit of money back if you sold your furniture, but chances are- it won’t be anywhere near what you paid for it new. So the question then becomes- what is the value of my dining table?
Including items like these will probably inflate your net worth above what it really is in my opinion- because we overvalue the stuff we have, compared to what the market is willing to pay for it. So is it really worth what we think?
The same can be said when you include your car into your net worth calculations- you have to include a value that you can achievable get if you sold it. Try bringing your car to a dealership and get a free appraisal on how much they will pay for it- you’ll be surprised.
When I calculate my net worth I exclude all household items, and I discount my car value by almost half- and then I calculate depreciation on top of that.
For the value of your investments and your household, I would include the current market value. This should be easy to calculate for your investments, but for your home, you will need to rely on something like Trademe insights, which are based on market trends, or QV values, which gives you the Rating Valuation. I look at the value on TradeMe insights and then discount it by 10% to be conservative. Both to include the cost of selling, and for any market fluctuations.
And what about your Emergency Fund. Do you include that in your new worth calculation? This question comes up from time to time over at r/PersonalFinanceNZ. Yes- of course, you do. Your emergency fund is the same as any cash in the bank or term deposits. It’s an asset.
Why Calculate Your Net worth?
So why should you calculate your net worth? It’s just a number- how can it help you?
Calculating and tracking your net worth might just seem like a feel-good sort of exercise. Every time you update it you can see how far you have come. But there are more benefits of tracking your net worth. First, you will have a better idea as to where you stand.
Net worth lets you understand your current finical situation
If your goal is to grow an investment portfolio large enough to achieve FI- your net worth calculation will show your progress to your goal- both in terms of how much you have invested and how much debt you carry. There’s no point in tracking only your investment portfolio as a part of a financial independence goal. You might have a portfolio that could sustain your spending using at 4% withdrawal rate- but did you consider your debt or mortgage payments as a part of your expensing calculations?
Net worth gives you a reference point for measuring your progress towards your goals
Ideally, as you continue to earn, save, and invest, your net worth will grow. So to be able to measure your progress you need to be able to track it. If a large proportion of your net worth is tied in the share market or other investments, tracking your net worth also reveals how well your investments are doing over time.
Why are you measuring net worth?
This is the real question you need to answer first. What’s your motivation behind calculating and tracking your net worth? Is it to make a humble brag like Mr Trump, who has been said to inflate his net worth. Or is it to track your financial health over time. Maybe you need an idea of your net worth so that you can consider purchasing a house or invest in real estate.
So if you want to have a go at calculating your net worth- start a spreadsheet or go check out one of the many net worth calculators from PAYE.co.nz or Sorted.org.nz. These are one time calculators, but it will give you an idea of what to include if you decide to track your net worth over the long term.
Personally- I track net worth, alongside my investment portfolio, for a number of reasons. One is that if I only track my investments, I would be ignoring that hudge mortgage debt (or student loan when I had one). I think track net wroth is more motivating than tracking the tracking just the size of your debt.
The second reason is that I like to be able to look back at how far I have come. It’s motivating to see that your net worth has more doubled since 2013- when I started tracking my net worth.
Thirdly, it’s good to track everything. Once you start tracking your mortgage size, and investments, your halfway there. Might as well add in your KiwiSaver, Car, and all your debts. That way you know how everything is going.
I currently track everything in a spreadsheet and work out my net worth there. I’ve been playing with the idea of moving it all over to PocketSmiths net worth tracking but haven’t got around to it just yet.
So, do you track your net worth, and do you think it is a useful exercise?
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I like the graph showing the % of net-worth by household. Very interesting.
Thanks Rohan