Whilst most commonly talked about in business context or when talking about celebrities, it is actually a really good idea to have an understanding of your own personal net worth.
It is actually a very simple concept.
Your Net Worth is calculated by summing up the current total value of all your assets (House, Cars, Savings, Pensions, etc).
You then subtract from this the sum of all your debts (Outstanding mortgage, credit cards, car finance, student loan, etc).
The total you would be left with is your Net Worth. This number can be positive or negative depending on your current financial position.
Getting an understanding of this number for your own personal finances is usually the first step in building out a longer term plan for your financial future.
If you have a negative net worth then your first goal would be to structure your budget around getting yourself back into a positive position.
Once in a positive position you can look to structure your budget around hitting a target net worth, which for many people is the £1 million mark.
What are my assets?
When calculating your net worth you need to have a good understanding about the current state of all your assets and their current market values.
For example, what is the current value of your house? For most people this will change due to fluctuating house prices so it is always a good idea to get your house valued every couple of years, or to keep an eye on marketplace websites to see what price similar houses in your area sell for.
Other assets that you should keep track of include:
- The money available across all your bank accounts
- Total value of your savings – including pensions.
- Things you own: jewellery, art & furniture
This just gives you a snapshot of where you may have assets, remember to give them an honest current market value – and not just the price you paid for them.
What are my debts?
As well as calculating the true value of all your assets, you also need to do the same for the total value of your debts.
Here are a few areas to consider:
- Car loans/finance
- Credit card debts
- Student loans
- Furniture (Sofa finance, etc)
Anything that you owe money on should be added to this section and totaled up to give you your current debt number.
What is a good net worth figure?
There is no silver bullet here and the answer will be different from individual to individual.
As a starting point you, if your Net Worth is currently negative then you may find that a good net worth figure for you is simply getting back to a positive net worth.
For a lot of people the dream is to reach the coveted £1 million mark.
At this point a good idea may be to select a goal amount to increase your Net Worth per year. So for example, you may say that a 25% year-on-year growth in your net worth will help you to reach your long term goal in 10 years – so you can structure your debt repayments and/or savings with the aim of reaching this goal.
I would suggest it is a good idea to know your net worth but not to fixate on it.
It is also a good idea to calculate this number every quarter to see if you are on track to meet your goals and if not you can adjust your budgets accordingly.
I have always been good with money – I budget well, avoid making impulse purchases and attempt to adopt a frugal lifestyle as much as possible. I love to share my personal finance tips with you to help you achieve your financial freedom as well.