A recent study conducted in Britain revealed money can’t buy happiness, and worse, it can drive anxiety. This information hardly comes as a surprise. Many of us have dealt with the emotional and mental toll of financial strain, at least once in our lives.
But just because money can cause us stress doesn’t mean it has to.
Here at Spaceship, we believe the more educated you are about money, the more empowered you are likely to be to make the right financial choices for your situation.
With that in mind, we decided to explore net worth and all that it entails: what net worth is, how to calculate yours, and why it’s important. Read on!
What is net worth — and why is it important?
Put simply, your net worth is the value of everything you own, minus all your debts.
If we were being all dramatic, we’d put it like this: if you were to sell absolutely everything in your life, down to your last stubby holder; then you used the cash to pay off all your debts; then the amount of cash you’d be left with would be your net worth.
But we’re not dramatic. (Truly!)
And in fact, you probably don’t want to sell off everything. Because you’re savvy and you have a superannuation account and, you know, you probably want to keep your stubby holder.
So, why bother thinking about net worth then? What’s it all about?
We believe net worth is one of the best ways to gauge where you’re at financially. Better than stacking up your income, better than comparing your assets. Here’s why:
Shawn is a single man who works as a teacher. He earns $72k annually. He lives with a few friends and pays $200 a week for his share of the rent. He drives a beat-up Honda worth $5k. His superannuation has around $45k in it. And he has $15k in stocks.
Henry is a single man who works as an architect. He earns $160k annually. He lives alone and pays $700 a week rent. He doesn’t own a car. His superannuation has around $65k in it. Last year, he went to Paris, and now he owes $17k on his credit card.
Now, consider these two men.
If all you knew about Shawn and Henry were that they earned $72k and $160k respectively, you would think to yourself: by golly, Henry is far richer than Shawn.
But stop right there! Actually, Shawn’s net worth is $65k and Henry’s net worth is $48k.
And this is why net worth is an important measurement and why we think it’s a good indicator of your overall financial health. Financial health encompasses everything from income to debts to what you’re doing with what you’ve got; it’s not just about how much you make.
Sure, you can build wealth faster with a larger income, generally speaking. But when it’s all said and done, your income makes you no guarantees. It’s usually up to you to build your net worth.
How to calculate your net worth
By now, you’re probably itching to calculate your net worth — so, let’s do this!
We’ll start by going back to the basic definition: your net worth is the value of everything you own, minus all your debts.
Now, when we say the value of everything you own, we’re not being literal.
When calculating your net worth, you wouldn’t factor in the minutiae such as your moisturising cream or your stubby holder. These items have sentimental value, sure, but they don’t usually have financial value, so you’d eliminate them from your calculations.
Instead, you’d add up the value of your home, your cars, your shares, your savings accounts, your retirement accounts, and any major valuables such as jewellery or art.
Here’s a basic checklist:
✓ Your home and other properties/land
✓ Shares and other investments
✓ Cars and other vehicles
✓ Major valuables
Now, make a list of all your debts, as per this basic checklist:
✓ Personal and other loans
✓ Car loans
✓ Student loans (e.g. HECS-HELP debts)
✓ Credit card and store card debts
Once you’ve written down the values, you’ll deduct the total value of all your debts from the total value of all your assets and savings. The result is your net worth!
Here’s an example from our Real Money Talk with Sophie:
Assets and savings:
Credit card: $5,000
Car repayments: $30,000
Government repayments: $2,000
Net worth: -$17,000
The net effect of knowing your net worth
When you finish calculating your net worth, you may be surprised. Some of us discover we’re doing better than we think. Others of us? Not so much.
Either way, you’re generally better off knowing your net worth.
There’s always time and space for improvement, so even if your net worth results came as a shock, don’t let them get you down. Take action and you could be driving towards financial freedom with the wind in your hair and your financial woes in the rear-view mirror!