Tracking your net worth is vital for financial well-being. Understanding and monitoring your net worth is a great way to assess your financial health.

This metric provides a clear picture of your financial status, helping you assess whether you are overspending, how much you have saved, and whether you are adequately preparing for retirement.

What is Net Worth?

Net worth is a measure of your overall financial health at any given time. It is calculated by subtracting your liabilities (debts) from your assets (everything you own). A positive net worth indicates that your assets exceed your liabilities, whereas a negative net worth means the opposite. Essentially, the higher your net worth, the healthier your finances are.

Assets are anything of value that you own. These can be tangible items like property and vehicles, or intangible items such as investments and savings. Common examples of assets include:

Cash

• Current account and savings account balances
• Investments (stocks, bonds, mutual funds, etc.)
• Collectibles (jewellery, art, rare items)
• Businesses
• Real estate (homes, land, time shares, and condos)
• Vehicles

Liabilities are your debts or obligations—money that you owe to others. Examples of common liabilities include:

• Student loans
• Alimony or child support payments
• Mortgage(s)
• Vehicle loans
• Credit card balances
• Taxes owed
• Medical bills
• Personal loans

To calculate your net worth, you simply subtract the total value of your liabilities from the total value of your assets. This calculation gives you a snapshot of your financial position at a particular point in time.

Why Net Worth is Important

Despite its significance, many people neglect to calculate their net worth. However, understanding it has several advantages:

Track Progress Over Time: Your net worth is a precise figure that you can track accurately over time. It gives you a clear picture of your personal finances. For instance, if you calculate your net worth every year, you can see whether it is increasing, decreasing, or remaining static.

Accurate Wealth Measurement: Unlike income, your net worth accounts for expenses and taxes, offering a more accurate measure of wealth. It provides a holistic view of your financial health by including both what you own and what you owe.

Balance Assets and Debts: Net worth shifts the focus from asset value alone to the difference between assets and debts. For instance, having £200,000 in assets but £150,000 in debt leaves you with a net worth of £50,000, which is a more meaningful figure than just the asset value.

Debt Perspective: It helps in keeping debt in perspective. For example, if you have £50,000 in debt but £200,000 in assets, your debt level is not extreme. This balance can reassure you that your financial health is stable.

Read more: How to get out of debt – FAST

Loan Applications: Lenders consider your overall financial health, including net worth, before approving loans. A higher number can improve your chances of securing favourable loan terms.

Be in Control of Your Finances

Tracking your net worth over time shows whether you are making progress towards your financial goals, such as starting a business or buying property. Knowing and understanding your finances can help ensure you are on track with your savings and spending. Regularly reviewing your net worth allows you to make informed financial decisions and remain mindful of your spending.

For example, suppose you aim to save for a down payment on a house. By tracking the numbers, you can see how your savings grow over time and whether you are reducing your debts. This information helps you stay focused and motivated to reach your goal.

Individual Financial Goals

It’s important to remember that there is no universal ‘magic number’. Everyone’s financial goals are unique. Just because someone else has a higher net worth does not necessarily mean they are happier or more successful. Your net worth and financial goals are personal and should be tailored to your circumstances.

For instance, if your goal is to retire comfortably, your target goal will depend on factors such as your expected lifestyle, retirement age, and life expectancy. Similarly, if you aim to travel extensively, you may need more assets to cover the associated costs.

Read more: Setting Financial Goals

The Importance of Tracking

At any given time, you might be working towards various financial goals such as paying down credit card debt, increasing your emergency savings fund, planning for retirement, paying off your mortgage, saving for your child’s education, or managing a daily budget. 

Focusing on each goal in isolation can make it difficult to get a clear picture of your overall financial well-being. Tracking your financial numbers can help you avoid unintentionally sabotaging one goal while pursuing another.

For example, if in January your net worth is £19,000, comprising £20,000 in home equity, £4,000 in savings, and £5,000 in debts, your goal might be to increase your savings to £5,000 within a year. 

Suppose you manage to save £100 each month, reaching your savings goal in 10 months, and your home equity also increases by £1,000. However, if your credit card debt rises to £7,000 during the same period, your overall net worth remains unchanged. This example illustrates the importance of balancing different financial aspects to improve your finances.

Calculating Your Net Worth

You need to start by listing your assets. Remember, assets include anything owned by you that can be converted to cash. Common assets are:

• Cash
• Current account and savings account balances
• Investments (stocks, bonds, etc.)
• Collectibles (jewellery, art, etc.)
• Businesses
• Real estate (homes, land)
• Vehicles

Next, list all your liabilities or debts, such as:

• Student loans
• Mortgage(s)
• Vehicle loans
• Credit card balances
• Taxes
• Medical bills
• Personal loans

Subtract your total liabilities from your total assets to determine your net worth.

Once you have calculated this, you can use this Wealth Calculator to see how your personal finances compares with others.

Five Key Reasons Net Worth is Important

Financial Identity: Your calculated number provides a true picture of your financial situation. You may have a high income, but without knowing this, you can’t fully understand your financial health.

Year-over-Year Progress: Taking a close look at your finances helps track your financial progress over time. Ideally, your net worth should increase annually, especially if you are planning for retirement. Monitoring this growth helps ensure you are on the right track.

Focus Beyond Income: Net worth shifts the focus from income to overall financial health. During retirement, your savings need to support you, and net worth helps gauge whether your savings are adequate. This is crucial for long-term financial planning.

Debt Awareness: Understanding your finances highlights the importance of managing debt. Even substantial assets may not be enough if you have significant debts. Reducing debt is as important as increasing assets for a healthy number

Loan Applications: Lenders consider your personal finances when assessing loan applications. High net worth can improve your chances of getting a loan, especially when you no longer have a regular salary. This is particularly important for retirees who may face difficulties in securing loans.

Finances and Retirement Planning

One of the critical aspects of understanding net worth is its role in retirement planning. For many, retirement may seem a distant goal, but the earlier you start planning, the better off you’ll be. Net worth gives you a clear picture of where you stand financially and how much you need to save to ensure a comfortable retirement.

For instance, consider two individuals, both aged 30, earning similar salaries. One has a net worth of £50,000, including savings and investments, and minimal debt. The other has a net worth of -£10,000 due to high student loans and credit card debt. The first individual is in a much better position to start saving for retirement, even if both earn the same income. Tracking our finances helps highlight these differences and guides more effective retirement planning.

Impact of Inflation on our Finances

Inflation erodes the purchasing power of money over time, which can impact your net worth. For example, if your investments do not grow at a rate that outpaces inflation, your net worth may effectively decrease even if the nominal value remains the same.

It is essential to consider inflation when planning your financial goals and strategies. Investing in assets that typically appreciate over time, such as real estate or stocks, can help mitigate the impact of inflation on your net worth.

Finances and Lifestyle Choices

Your lifestyle choices significantly impact your finances. High living expenses, frequent use of credit cards, and inadequate saving habits can all lead to a lower net worth. Conversely, adopting a frugal lifestyle, avoiding unnecessary debts, and regularly saving can help increase your number over time.

For example, someone who consistently spends beyond their means, relying on credit to finance their lifestyle, will see their net worth diminish as debts accumulate. On the other hand, someone who lives within their means, invests wisely, and saves regularly will likely see their personal finances grow steadily.

Building Wealth: Practical Steps

To build and maintain a healthy personal finances, consider the following steps:

Budgeting:

Create and stick to a budget to manage your expenses and savings effectively. This helps prevent overspending and ensures that you allocate funds towards debt repayment and investments.

Read more: How to create a budget in 6 easy steps

Emergency Fund:

Establish an emergency fund to cover unexpected expenses. This prevents you from dipping into savings or accruing debt when unforeseen costs arise.

Debt Management:

Prioritise paying off high-interest debts, such as credit card balances, to reduce your liabilities. Consider strategies like the snowball method (paying off small debts first) or the avalanche method (tackling high-interest debts first).

Investing:

Invest in assets that appreciate over time, such as stocks, bonds, or real estate. Diversify your investments to spread risk and enhance potential returns.

Regular Reviews:

Periodically review your financial situation. Adjust your strategies as needed to stay on track with your financial goals.

Net Worth in Different Life Stages

Your goals and strategies will change as you move through different life stages.

Early Career (20s-30s):

Focus on building assets by saving and investing. Pay off student loans and avoid high-interest debt. Start a retirement fund to take advantage of compound interest.

Mid-Career (30s-50s):

Continue building assets while paying down any remaining debts. Invest in higher-return assets and ensure you have adequate insurance. Start planning for children’s education and your retirement.

Pre-Retirement (50s-60s):

Maximise retirement savings and reduce liabilities. Consider downsizing your home if it aligns with your financial goals. Review your investment portfolio to ensure it aligns with your retirement plans.

Retirement (60s and beyond):

Focus on preserving wealth and generating income from your assets. Monitor expenses closely and adjust your lifestyle to match your financial situation. Consider estate planning to manage the distribution of your assets.

Conclusion

Understanding and tracking your finances is vital for achieving financial security and reaching your financial goals. It offers a comprehensive view of your financial health, allowing you to make informed decisions about spending, saving, and investing. By regularly reviewing and adjusting your financial strategies, you can ensure that your net worth continues to grow, providing a solid foundation for a secure and comfortable future.

If you have any questions or if you need help with getting a handle of your finances, contact me today using the comment form below or email me at hello@moneyandmarriage.net

I am here to help you navigate your financial journey and achieve your financial goals.