Why is Knowing Your Net Worth Important?
Net worth is simply defined as the total value of everything you own (cash, house, cars, and investments) minus your liabilities (debts). Liabilities are what you owe and Assets on the other hand is the stuff that you own. When your end goal is building wealth, knowing your net worth is one of the best ways to see where you stand financially, what needs to be fixed and how far you still have to go.
Net Worth = Total Assets – Total Liabilities
What are Assets?
Your assets include:
- Residential property;
- Household content (furniture, jewellery, art, etc.);
- Vehicles;
- Boats;
- Planes;
- Cash on hand;
- Investment assets (equities);
- Retirement funds (pension, retirement annuities).
What are Liabilities?
Your liabilities include:
- Mortgages;
- Vehicle finance;
- Other debt: bank overdraft, credit cards, store cards, personal loans, student loans, and bills outstanding (medical, rent, cell phone);
- Other loans.
Misconceptions About Net Worth
- Having a high income does not imply you have a high net worth. Your net worth is not your income.
- Your net worth isn’t just about the assets or stuff that you have. You can own assets worth millions of Rands but if you have liabilities running into millions of Rands you are not a millionaire. It is critical to pay down your debt to be able to build your net worth. The steps you take after calculating your net worth are just as important.
How to Calculate Your Net Worth
Step 1: Add Up Your Assets
Consider the following example: Sam has the following: Home valued at R1 000 000, Pension fund with R100 000, Car valued at R450 000, savings account balance of R50 000, cheque account balance of R2 000. His total assets = R1 602 000.
Step 2: Add Up Your Liabilities
Sam has credit card debt of R150 000, a personal loan debt of R50 000, mortgage balance of R600 000, a car loan of R250 000. His total liabilities = R1 050 000.
Step 3: Subtract Total Liabilities from Your Total Assets to Get Your Net Worth
Net Worth = Total Assets – Total Liabilities. For Sam, that means R1 602 000 - R1 050 000 = R552 000.
Sam's net worth is valued at R552 000.