It’s another way of working out how wealthy you are and an important first step in setting financial goals and building a financial plan to increase your net worth over time.
The composition of your net worth is important too. It's the balance between your assets that provide a cash income, such as an investment fund, and your non-cash producing assets, such as your house.
Calculating your current net worth will help you set goals when you review your position – probably once a year. You'll need to ask yourself two things:
· Is my net worth increasing overall?
· Is the composition of my net worth about right - that is, do you have the right balance of cash and non-cash assets?
Does my net worth matter?Net worth is really important when you're thinking about retirement. Most people will want to be debt free, have a house and have some money to live on.
As you approach the end of your working life, you need to replace the income from your job with income from investments. Ideally you should alter the composition of your net worth to include more cash producing investments - for instance, selling a house to invest and live off the capital.
Test: who’s better off? Hine and Harriet, both aged 23, work out their net worth. Harriet, who has been working since age 16, has savings of $15,000, a car worth $10,000 and furniture and personal possessions worth around $25,000. She has no debt, so her net worth is $50,000. She's earning $25,000 a year and that could increase to about $35,000 with promotion over time.
Hine has just completed a law degree, has $5,000 of personal assets and a student loan of $20,000 - her net worth is negative $15,000. She has just started her first full time job and is earning $30,000 a year – but after 10 years she expects to be earning about $150,000 a year.
They discuss who is better off. On the basis of their current net worth, Harriet is better off by $65,000 and Hine feels envious of her friend’s financial freedom.
Harriet laughs and offers to swap any time. She works out that if she works for another 35 years, she’s likely to earn around $1.1 million before tax - Hine’s likely to earn $4.1 million.
Hine realises that even though she has student debt right now, getting it was an investment in future earning capacity. Her education is a valuable asset – even if it doesn’t show up in her net worth calculations right now.
How much are you worth?Calculate your net worth now - write down the value of what you own and subtract the amount you owe. The difference is your net worth.
Write down the goal for your net worth in 12 months time. Think about where the growth is likely to come from - for example, $3000 from savings from your pay, $400 from growth in investments, $2000 from an expected tax refund. Over a few years you could graph the changes to your net worth.
For more information and tips to build your net worth visit
Sorted.org.nz. Sorted is packed with information and powerful calculators to help you get ahead.
