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Understanding your financial net worth is one of the most important things that you'll need to do as you work towards your Financial Independence.
This concept is important not just in your personal life but also in the life of your business if you run one.
It is easy to think that you have it all in your head and you roughly know what this number is.
Some people don't even bother trying to calculate this because they feel they either have little to no assets or too many debts.
If you're in any of these camps, this is exactly one of the reasons why you need to work out your financial net worth.
[yellowbar]Your net worth exists already whether you like it or not. Getting to know it and grow it is critical to your freedom.[/yellowbar]
Writing it down and discussing it with your partner periodically helps guarantee your net worth doesn't stay stagnant and most importantly, that it moves in the right direction.
What is your Net Worth?
Working out your net worth involves two broad things namely Assets and Liabilities.
Net Worth = Total of All Your Assets less the Total of All Your Liabilities.
An Asset is anything that makes you money. They essentially help you generate financial wealth by working for you.
E.g. Investments into a rental property that generates net profits; investments in shares that earn dividends; or intellectual property (books, music etc.) that you have rights to that generate some royalties.
Other assets include cash, amounts people owe you (debtors) etc.
A Liability is anything that costs you money.
E.g. Overdrafts, secured loans, credit card balances, mortgages, personal loans, amounts owed to the tax man, car loans, rent owed, student loans, unpaid bills etc.
When your assets exceed your liabilities, then your net worth is in a positive net asset state. This is the place everyone should aim to be in.
When your liabilities exceed your assets, then your net worth is in a negative net liability state.
I have put together a neat template for you to work this out. Feel free to download the FREE Financial Net Worth Workbook below:
The workbook also has an example and guide notes so that absolutely anyone can work this out simply by inputting some numbers and text.
How often should you work this out?
I work out our financial net worth monthly and discuss it with my wife at our quarterly weekends away.
Part of what we do when we have these discussions is also talk about how well our assets are working for us and what our plans are to grow our net worth.
The thing to remember is that your net worth is constantly changing. Therefore, the above template for calculating it is a living document that you will add to and change a lot in the future.
Why Is Knowing Your Financial Net Worth Important?
1. One Page Snapshot
Your financial net worth gives you a snapshot of your current financial health and position on one page.
This is super important because seeing what you own and owe on one page will help you make better financial decisions.
Knowing your financial Net Worth will motivate you to Act
i.e. you’ll either work to grow your assets and make them work better for you and/or reduce your liabilities; focusing only on good debt (via investing) that is often necessary for growing your financial wealth.
3. Keeping informed
A lot of people often have no idea what exactly they own or owe.
Where they do, they might not have current information about their assets and liabilities, or information on what it might be costing them such as interest rates on their most costly debt.
Working out your net worth will require some time commitment from you initially as you need to gather financial information about your life.
However, this exercise will reward you in the near future as you will be all over your numbers and know what to do next.
Planning is key to achieving your future goals.
Chances are, you’re either thinking about your Financial Freedom but feel very far from it, or you might already be working towards it.
Knowing your current net worth will help you start to think about how you can design your financial life such that you begin to take the necessary steps towards defining and achieving your financial independence.
Related: 7 Steps to Designing Your Financial Life
[redbar]Knowing your net worth also helps you plan better for inheritance tax purposes.[/redbar]
I have sadly known of a situation where someone passed away and no one knew what assets and liabilities they had and where they were held.
Having that one-pager net worth will at least help make the necessary conversations between family members easier.
How Can You Grow Your Financial Net Worth?
1. Increase your assets by making extra money
This is by far the best way to grow your financial net worth.
Making extra money can lead to you having larger savings that can help to grow your pension or freedom fund.
It can lead to you being able to invest in more assets (e.g. property, shares) that work for you instead.
Check out my post called 85 Ways To Make Extra Money for a tonne of ideas.
Starting an online business or Blog is one way of making more money and boosting your net worth. Join this Free course to learn how to make money blogging
2. Reduce your liabilities by paying down debt
Paying down your personal debt quicker is critical to your financial freedom because the debt compounds alot slower.
Making extra money helps to pay down your debt quickly. See 85 Ways To Make Extra Money
Budgeting effectively is also critical to managing your financial lifestyle, releasing the necessary funds to tackle your debts head-on.
Related: 15 Tips to Help You Stick to Your Budget
If you've enjoyed reading today's post, feel free to join the Free Master Your Money course, where a lot more of such topics are covered. Alternatively, complete the form below this post.
Got any tips on how you have quickly grown your net worth? Please comment below
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.
Dr. Pepper says
Interesting article Ken, thank you. Everyone talks about education as an investment. Shouldn’t that also be taken into account in the net worth calculation?
Ken Okoroafor says
You make such an interesting point. Education is certainly an investment, however, the issue comes down to what value you can ascribe to it as an investment. I personally keep the net worth calculation as practical as possible and would keep education out. If the education is good, it will eventually lead to an asset that has a marketable value some day 😉
Ruth Makes Money says
Thanks for such an interesting post. I’m definitely guilty of ‘having it all in my head and having a rough idea of the numbers’, like you mentioned, but I know I should be being a little stricter with keeping track. I’ve put these calculations in my diary for each quarter this year 🙂
Ken Okoroafor says
Hey Ruth, thanks for reading this post. There is a massive benefit to writing things down. I am now even thinking of starting Journaling as Michael Hyatt does. Anyhow, let me know how you get on 😉