This is the final installment in a series about financial recovery
Well folks, this is it. The final article in the financial recovery primer. This is when we talk about the big picture: Net Worth. You may have heard the term net worth and you may wonder what it means. Let’s dive right in to learn exactly what net worth is, how to calculate it, and what it means to you.
First – what IS Net Worth? In very simple terms, net worth is everything you own minus everything you owe. For example, your house: if you own your house, take the value of your house (not necessarily how much you paid for it, but what is today’s market value?) and subtract your mortgage balance and any other loans associated (a home equity line of credit, for example).
If your house is worth $200,000 and your mortgage is $125,000, then the difference, $75,000, is the bottom line in your net worth calculation. Again, this is a very simplified example.
So, what other types of things that you own are included in net worth? Your liquid assets – meaning cash, checking, savings, retirement savings, cash value life insurance, etc. Also, tangible assets that will appreciate in value. For example, jewelry, art, home furnishings. Any real property you may own – not just your home, but any land or rental property you own.
What about your car? This is a line item that is completely debatable. The thing about cars is: the minute you drive off the lot after you’ve purchased a car, the value starts to go down.
For this reason, some folks do not include the value in their net worth calculation. If you do, just remember: the car is going to go down in value over time UNLESS it is a collectible.
For the sake of simplicity, and because you do include a car loan in “everything you owe”, let’s include the value of the car in “everything you own”.
Speaking of everything you owe, what should we include here? This is more straightforward: mortgages, credit card balances, student and car loans, medical balances payable. If you make a monthly payment to reduce the debt, you should include it in “everything you owe”.
Right now some of you are thinking, ‘what I owe is significantly more than what I own.” That may be true. But part of financial recovery is knowing and admitting where you are and making a commitment, one day at a time, to improve your finances.
What could be better than knowing your starting point and watching your progress over time? Net worth is the single most important statistic to watch over time to show your financial health is improving.
You’ve already done the hard work of figuring out exactly what you owe and to whom, now just tack on what you own.
I challenge you to check in on your net worth once a year. When you do your taxes, for example. That would be the perfect time to check in and compare to where you were last year.
Now, what “should” your net worth be? That is a tougher question to answer. To me, the best answer is: your net worth should be higher now than it was this time last year. But if you want specifics, there is a formula for that. It is a formula from a classic personal finance book, “The Millionaire Next Door” by William Stanley and Thomas Danko:
Net Worth= Age x PreTax Income/10
This is a general guideline and you may find arguments for and against this formula, but it’s a good place to start. So if you are 40 years old and make $35,000 a year, according to this formula your net worth “should be” $140,000. But again – every person’s situation is unique, and there isn’t a single formula out there that is one size fits all!
I want to leave you with a final thought about net worth: you, as a spiritual being on this Planet Earth, have infinitely more value than your net worth.
What I mean is – ultimately, it doesn’t matter if your net worth is $10, $100,000 or $1,000,000 – you are as valuable as any other human on this planet.
Please do not get hung up on the numbers. Get hung up on making yourself better than you were yesterday.
Your worth is greater than your net worth.