Most people are at least vaguely aware of the concept of personal net worth, if only in the context of conversations about “high net worth” individuals.
We have a look at why it’s important to know your net worth, we consider the math behind it, and we find out how you can improve it over time.
Tip: Increase your wealth by investing your money. Find out more.
Why you should know your net worth
Your net worth is based on your complete financial profile. This includes your investments, savings, debt, and any other asset or liability that’s linked to you.
Hardus van Pletsen, owner at Stock Market College, notes that it’s easy to deceive ourselves by, for example, feeling flush on payday, and destitute when debit orders are deducted. However, a longer-term view is critical.
“By keeping track of your net worth, you’ll have an accurate view of your wealth and future safety. It also helps motivate you to save more, pay off your debts faster, and invest,” he says.
How to calculate your net worth
Van Pletsen says that the emphasis with “net worth” is on the word "net". “You need to take all of your assets, including everything you own that has value, and subtract your liabilities, which include everything that you owe someone else,” he says.
“At face value, this calculation seems pretty easy. But you can still get to different answers by including or excluding items.”
For instance, Van Pletsen says that if you are conservative with this calculation, you will only include assets that you’re sure have a real-world value. This may include your car, but not your collection of Celine Dion albums.
“The above approach is often referred to as your ‘tangible net worth’ and it does not include anything that can be considered intangible – such as a promise of some future income or a brand name,” says Van Pletsen.
The money you owe on your assets must also be included under your liabilities, he notes.
“If you have a car worth R200,000, but you owe the financiers R100,000, then you can only add R100,000 to your list of assets. The R100,000 you owe will have to be added to your liabilities. The same applies to property, or any other sellable asset that you may still owe money on,” says Van Pletsen.
How can you grow your net worth?
Van Pletsen notes that the first place to start is always your salary. He explains that if you can handle this money with the care it deserves, you are well on your way to building a good net worth.
“When it comes to salary, be pedantic. Pay off expensive debts as quickly as possible, fight for a good increase, review your taxes and the structure of your salary for possible savings, and try to squeeze as much value out it as you can,” he says.
Once that’s done, he suggests focusing on building real wealth by investing a portion of your money. While this may seem risky, he explains that it simply feels this way because of the element of the unknown.
“You can invest in risky assets, but you can also invest in safe and stable assets. It all comes down to knowledge,” says Van Pletsen.
He points out that the best investors split their portfolio to include both risky and safe investments, and they aim for growth over time, not necessarily for a quick win.
“The benefit of investing is that your money stands to grow significantly more than will your salary through the usual annual increases. It also forces you to keep good track of your income and expenses, which makes you a more responsible person in general,” he says.
Are you ready to start investing? Find out which options are available with JustMoney.