What is my net worth?

When you look up information about the rich and famous you often see references to their net worth. So it is easy to think your net worth is something you should only concern yourself with when you are super rich.

But everyone should pay attention to their own personal net worth and use it to build a better financial life. Net often refers to something after costs or debt. In the case of your net worth, it is what you are worth after all your debts have been paid. If you were to sell all you owned today and pay off all your debts with the proceeds, what you have left is your net worth.

You may earn a lot, have a lot of money in a bank account or own a big house, but if you are spending all that you earn and / or your debts relative to that cash or house are high, your net worth – and ultimately your wealth - may still be relatively low. This is why you should not judge someone’s wealth by the income they earn or the things they own, without knowing their expenses and the debt they owe.

People with modest incomes can build significant wealth and increase their net worth by spending wisely and investing in things that increase in value over time.

How is your net worth linked to financial independence?

If you are looking to grow enough wealth to be able to be financially independent, bear in mind that your home and vehicles are not assets that you will use to fund your future lifestyle. Deduct these from your net worth to see what you have left to finance your future independence and when you can live off your savings rather than work for a living.

If you are saving for retirement, it is useful to consider your living costs as a percentage of your investment net worth – the ideal is between four and five percent. If you draw more than this from your investments, you risk depleting your capital too quickly.

How do you calculate your net worth?

Working out your net worth is simply a matter of listing and adding up the value of what you own - your assets and what you owe. Then subtract what you owe from what you own to determine your net worth.

What you own (your assets) includes things like your home if you own it, any other property you own, your investments, your retirement savings, shares you own in your own business or its market value, your cars and furniture and cash in the bank.

Remember the value of your home and business should appreciate each year – it is not the amount you paid for it but rather the current market value.  In order to value any property or business you own, you will need to pay for a professional valuation or use an evaluation offered by an estate agent or business broker. Be careful about the value of your business you bank on as these values can fluctuate wildly.

What you owe (liabilities) includes your home loan, vehicle financing, credit card, overdraft, personal loans, student loans or store cards. These should be easier to value as the current outstanding balance on any loan or credit agreement should be recorded on your statements.

Why is it good to track your net worth?

Tracking your net worth over time – even just periodically throughout your life can:

• Help you focus on the balance between what you own – your assets - and how that is growing relative to what you owe – your liabilities and how those are growing.
  
  
• Highlight potential problems if your liabilities are growing faster than your assets and focus your attention on the need to reduce debt or diversify your assets.
  
  
• Help you grow your wealth in a sustainable way rather than making incorrect assumptions by comparing what you own or spend to what other people own or spend.

How does your life stage impact your net worth?

Depending on your life stage and how you manage your money, you could have a negative or a positive net worth, but ideally you want to have a positive net worth soon after you start your working life.

Young and starting out

If you are just starting to work and have student debt to repay or you have a bought a property that has yet to appreciate in value, you may owe more than you own but this situation should change as you pay down the debt, your property and / or your earnings appreciate and your save more.

In your mid-life 

At this stage of life you are likely to own more property and have more savings, but it is also easier to take on debt for bigger homes, vehicles and other spending that supports your lifestyle without growing your net worth. Keeping track of your net worth can be a useful guide to ensure you are actually growing your wealth.

Near the end of your working life 

By the time you are nearing the end of your working life, your net worth should be much higher as your debts should ideally be repaid or almost repaid and your assets should have grown at more than the rate of inflation and at more than the interest on your debt.

Remember that it is not enough to just pay off your home by the time you retire. You need savings to live off while you live in it and you can’t live in your home and off the value of it at the same time.

In your retirement years

In your retirement, your asset growth may slow especially if you draw an income from your savings. You may also invest more conservatively, but you should ideally not be incurring debt or running your wealth down too quickly as you may need it to support you for many years.

How do I grow my net worth?

The way to grow your net worth is to ensure your assets grow faster than your debts. You can do this by:

• Paying down debt
  Paying down debt will reduce not only what you owe but will reduce the interest that is applied to these liabilities and the total amount you will need to repay. Paying extra into your home loan can provide you with a good inflation-beating tax-free guaranteed return but only as long as you do not draw it out, and when the loan is paid up you divert your home loan repayments to an investment.
  
  
• Clear investment goals
  Be clear about your investment goals and their time horizons so you can save and invest in appropriate assets with suitable growth rates.

You may need savings in a bank account or invested conservatively for some of your goals, but if you have too much exposure to such assets, they may not grow enough to increase your net worth. You should ideally have three to six months living costs saved for emergencies. This money may need to be invested conservatively but the balance needs to be in diversified investments that will grow at more than inflation.

Have an appropriate portion of your wealth invested in a well-diversified portfolio of assets with good potential to grow – such as investments with a good exposure to property and equities on listed stock exchanges, physical property in a good area or a thriving business.

• Reduce assets declining in value
  Reducing your exposure to assets that are declining in value, such as vehicles (other than what meets your transport needs), property that is neglected or in an area that is deteriorating or a business that is floundering.
  
  
• Spend within your means
  Keep your lifestyle spending below your income so you can save and invest in assets that grow your wealth and your net worth.
  
  

How much should my net worth grow each year?

You can work the percentage growth in your net worth from one year to the next as follows: net worth this year – net worth last year  / by net worth last year 1 x 100.  

However, it isn’t possible to say by how much your net worth should be growing each year – this will depend on many factors unique to you including:

• Your savings and investment goals and the rate of return you are earning from each savings account and investment. Remember some investments may be long term ones exposed to higher levels of investment risk. These investments are intended to deliver good returns over longer periods but may decline over shorter terms.
  
  
• Your capacity for, and ability to stomach, investment risk.
  
  
• Your earnings capacity and how you balance work and life.
  
  
• Your personal circumstances and spending priorities.

However, your net worth should at least be keeping up with inflation to avoid your wealth declining in real (after-inflation) terms and growing at more than inflation to ensure you are getting wealthier each year.

This article was written by Smart About Money editor Laura du Preez. It was reviewed by Ian Beere, wealth manager at and chairman of independent financial advisory practice, Netto Invest.