“The desire of gold is not for gold. It is for the means of freedom and benefit.” – Ralph Waldo Emerson
In Finance 1-2-3, we discussed that you should first start by knowing your net worth, but how does it really work? and how often should you review your net worth?
If you need a dumb-down definition, net worth is a baseline. The baseline of your financial life. You take a picture of your current status and it allows you to evaluate where you are and where you are headed.
The simple: “things you owned minus things you owe” saying seems easy at first but then it can get complicated in the details. Car loans for example do we only count the debt? The response is no. There is numerous variation of this calculation, as you can go as much in detail as you want. So where to start? Let’s break this down into 2, asset and liability :
- Asset calculation
Sum up everything that you own – the value of them.
For physical items, you must think selling price. Ask yourself: how much would you sell this item for right now, that is the value of the items. You can go crazy and add up every cup of coffee and dining plates in your kitchenette or you can do like me and calculate it with everything that is over $5,000.00 – like your car, your home cinema set up, your jewelry, your thousand dollar bicycle.
Then, add up the following:
- The total value of savings: For Canadians: your RRSP, your TFSA, anything else
- The total value of investments at the moment: This can be all your stocks that are not in a savings account (in the point above)
- Real estate you own: current market value of your principal home + all other homes you owe
- Car value – you can find it online by inserting your make, model and year on google or the black book
- Checkings account amount
- Any other assets
- Liability calculation
Sum up everything you owe – borrowed money
This part is usually easier to identify because most people know what they owe. Start with your small payments, any buy now pay later, electronics line of credit, small loans from independents.
Then, add up the following:
- Total credit card debt amount
- Total Mortgage – the amount of money left to pay for your house (or houses)
- Car loan – the amount of money left to be paid for car payments
- Student loans – the amount of money left to be paid for a student loan
- Any other debt
Now that you have gathered all the information, one simple calculation is left to do, your sums of assets minus your sum of liability, the total value obtained is your net worth!
From what I have heard a net worth of 0 is usually a good sign, positive net worth is an amazing thing and a negative one is asking to be worked on. Don’t panic, if you have a negative net worth because of your house value, it will pay overtime but if it’s due to retail therapy – it is probably time to rethink your financial priorities.
Knowing your net worth is necessary for future financial planning. Do you have to save more? Focus on paying your loans more? Invest a bit more? One quick look at the number and you will know what to do!
For transparency purposes, I must share with you that my net worth currently sits in the high minus 5 digits – decimal nonincluded. That is all I will be sharing, for now, let me know if you have found this insightful in the comments below!
On that note,
Josie Escapes…
