Have you ever read those articles about people who have lots of investment properties? You know the ones, where the headline screams ‘How I bought $4 million worth of property in 2 years’ or something equally click-baity.
The focus of these types of articles is usually the asset value (the value of the houses) rather than the investor’s net worth.
They may have $4 million worth of property, but often they also have $3.8 million in debt. If they had to sell all that property tomorrow, they would be left with $200,000 – less once you include selling costs.
This difference between the value of their assets and the cost of their debt is their net worth.
How to Calculate Your Net Worth
There is nothing complicated about calculating your net worth — it’s a simple equation. You add up your assets and subtract your liabilities (your debts).
Money Smart has a great net worth calculator to make it really simple for you.
What Does My Net Worth Mean?
If the figure is negative, it means you owe more than you own. If the number is positive, you own more than you owe.
Why Your Net Worth is Important
Focusing on the value of assets is not an accurate measure of wealth. The true measure of your wealth is your net worth.
Many people never bother to calculate their net worth, but it is important because it allows you to measure your financial progress from one month or year to the next. If your net worth grows over time, it shows you are moving forward financially. If it is declining, you have some work to do.
How Do I Improve My Net Worth?
Calculating your net worth can be an intimidating experience, particularly if the net worth number is either low or negative. But net worth is simply a number that exists today, and you can change it in the future.
In fact, the whole idea of calculating your net worth is to establish a baseline from which you can improve your financial position.
There are two ways to improve your net worth:
- Increase your assets, and/or
- Decrease your debts
You can do this in any combination you choose — building up your assets while keeping your debts level, paying down your debts while keeping your assets level, or a combination of both.
Always remember: your plans for your net worth are more important than where your net worth is at right now.
Do you know your net worth?
Her Money Matters tips:
- Knowledge is power. Calculate your net worth using the Money Smart net worth calculator Make a note of your net worth, as at October 2017.
- If you have significant liabilities, get laser-focused on reducing them.
- In April 2018 (six months from now) we are going to do this again to see how your net worth has improved.