What do you think of when you hear the term ‘net worth’? Do you think of millionaire bankers with yachts? Someone who’s a bit of a dick? Does your mind automatically shut down (‘Boooooring!’) because it sounds like a meaningless financial term?
Well, I’m here to show you why knowing your net worth is both really simple and really useful.
Anyone who tries to tell you this stuff is complicated is LYING. It is, quite simply, a snapshot of your overall financial situation, right now, in pounds and pence. All you do is add up all your assets (savings, money in your current account, your £500 guitar lying neglected in the corner) and take away all your debts (credit cards, money owed to friends, etc).
The number you end up with will either be a positive number (you own more than you owe) or a negative one (you owe more than you own).
The process itself is dead simple. The only hard bit may come when you have to face up to some hard truths.
In 2010, I worked out my net worth. The calculations were painless. What hurt was the number. I was £12,139 in the red. My debts were massive and I had no savings at all.
I’ve since been paying down my debts and my mortgage, and I’ve even started putting a teeny bit of money aside.
Each year, I work out my net worth again, and each year it improves.
This year, I totted up my assets, subtracted my debts, and the number popped out: £12,139.
I was struck by the coincidence. The same number as six years ago. Except this time, there was a plus sign in front of it rather than a minus sign.
Don’t be disheartened if your net worth is a negative. It’s a starting point. Progress for the first few years may start slow, but it soon builds up and builds up as your expensive debts shrink and your savings start to earn their own money.
That’s why, hopefully, if you plot it on a graph over time, your net worth shouldn’t just go up in a diagonal line, but an exponential curve (remember those from school? Nah? Ok, here’s one)
It’s also a really good way of working out if there’s a problem with your finances and you’ve been putting your head in the sand. Your net worth should not be getting worse every year, unless there’s a very good reason, like you’re retired.
You might hear people arguing about what you should include in your net worth – such as whether you should include the value of your house, pension pots, the resale value of all your crap.
I honestly couldn’t care less how you do it. Just be consistent, and be honest with yourself.