Understanding your financial health for long-term growth.
For most people, when they hear "personal finance", they automatically start thinking about how much they earn or how much debt they have. Yes, your income plays an important role in your financial life, but there’s actually another number that is more effective when reviewing your financial health.
Do you know what that is?
Your net worth.
What is Net Worth?
For the longest time, whenever I heard "net worth", I thought it was something that only super-rich people have. Unless you are a multi-millionaire, you can't have a net worth.
I have since discovered that this isn't true (but I can't be the only one who thought this, right?), because everyone, regardless of their income, has a net worth.
Your net worth is a number that represents your total financial value, including your assets and liabilities. Assets are anything of financial value and liabilities refer to any loans or debt you owe.
If you subtract the total worth of your liabilities from the worth of your assets, the amount you get is your net worth, which is a pretty accurate picture of your financial health.
Look at it this way, Dammy might be earning 400k monthly, but has no savings or investments because she took out a bank loan to buy a house and she's still paying for it. In this situation, the net worth is likely negative even if the income is high. Dammy might be where the money resides, but she has poor financial health. That’s why income shouldn’t be an indicator of financial success. It’s what you can keep and put away from what you earn that matters most.
Your net worth is so important because it looks at the long game and shows how much financial value you really have. Though there is a fairly simple formula to calculate net worth, there are some differences based on preference.
For example, some people choose not to add the value of their house since they live in it because it is not an investment property. Some common net worth questions include:
Do I include my savings in net worth?
When calculating your net worth, you want to include all of your assets. Your savings are considered an asset and have a cash value that can add to your net worth. You can also include any retirement accounts in your net worth.
Is my house part of my net worth?
For most people, the value of their home is the largest part of their net worth. There is a reason why the phrase “house rich, cash poor” exists. In your net worth calculation, you want to include your home as an asset. But if you have a mortgage, you’d have to include it in liabilities. For some people, if the house is residential and not for investment purposes, they don't include it in their net worth calculations.
Why You Should Calculate Your Net Worth
Calculating your net worth can show you if you’re really making financial progress or not. We all want our net worth to go up, so you can decide to check your net worth every quarter to see how you’re doing. If the number isn’t moving up, then you probably need to limit your liabilities. That might mean paying your debt and limiting your expenses so you can free up a bit more money.
Calculating your net worth is so straightforward and fairly easy. You should have a budget, but it's easy to get lost in tracking every little expense or coming up with an accurate number for each category. If your budget isn't sticking, you can track your net worth instead to get a better look at your finances.
How to Calculate Your Net Worth
You don’t have to be the winner of the Cowbell maths competition or use a super complicated formula to calculate your net worth. Here are a simple formula and steps to take.
Simply put, Assets - Liabilities = Net Worth
Step 1: Add Up Your Assets
The first thing you should look at are your assets. Make a list of everything you have that has some financial value. They can be:
Savings account
Retirement account
Cash
Stocks
Mutual funds
Cryptocurrency
Agricultural investments
Car value
Home value
Note: If you own a company, you should do a separate business net worth. To do that, you should know that there are tangible and intangible assets. Tangible assets are physical things such as buildings and equipment. Intangible assets are things that have monetary value but aren’t physical, such as intellectual property or copyright. Intangible assets are assets because they have the possibility of making money in the future. As a business owner, you can start from there to calculate your business's net worth.
Step 2: Review Your Liabilities
The next step is for you to list your liabilities and see how much you owe in total to your creditors. Your liabilities might include:
Student loans
Mortgage
Car loan
Personal loan
Medical debt
Tax debt
Review each liability and write down the amount you owe. When you’ve listed all of your liabilities add all of them up to get the total amount.
Step 3: Subtract the Total Amount of Your Liabilities From Your Assets
Immediately you get the accurate amounts of both categories, you can take the amount of the total assets and subtract the liabilities amount from it. The remaining number is your net worth. Boom! Done.
For Example:
Assets:
500k - Access Bank
500k- Piggyvest Savings account.
1 million- Retirement account
400k- Farmsby Investment
2.5 million - Car value
Liabilities:
10million - House loan debt
3 million- Medical debt
Assets = 500k + 500k + 1million + 400k + 2.5 million = 4.9 million
Liabilities = 10 million + 3 million = 13 million
Then take your assets (4.9 million) and subtract liabilities (13 million) = -8.1 million.
In this case, there is a negative net worth which means liabilities are more than the value of assets. To gain a positive net worth, you’d pay your debt and put more in savings and investments. Your assets have to be more than your liabilities for you to get a positive net worth.
Simply put, Your net worth is important as it can show you your real financial health and how the process is going. It can tell you where you are falling short. Like Shakira's hips, the net worth number doesn’t lie! Regardless of where you’re at (even if you have a negative net worth), the goal is to increase your net worth over time. Don't be discouraged, don't feel bad. Instead, dust yourself up, buy shawarma and a cold bottle of juice, and get to work. We are rooting for you!
