The net worth of the two richest men in the world- Elon Musk and Jeff Bezos swings between $175 billion and $190 billion, depending upon the ups and downs of the stock markets. While the net worth of Elon Musk, founder of Tesla and SpaceX sometimes overtakes that of Jeff Bezos, founder of Amazon, there’s no saying who would be the wealthiest person on this planet on any given day.
At the same time, an average citizen of Burundi, a small country in Africa doesn’t exceed more than $14 on any given day. The same is true for inhabitants of many poor countries around the world: they have no significant net worth that would make any difference to their lives or help live a better lifestyle.
But what exactly does this term ‘net worth’ mean? And why is it important to calculate your net worth?
In this article, I will answer both these questions. Because, net worth decides several factors that affect our lives both directly and indirectly. It helps us understand where we stand financially and can help chart a roadmap to increase savings and investments for a better life and future.
Understanding Net Worth
Broadly speaking, net worth is the total value of all the financial and non-financial assets that we hold, minus the money we owe in debt or credit in any form.
Some typical examples of our financial and non-financial assets include:
- Savings Plans
- Investments in stocks, Exchange Traded Funds, Mutual Funds, currencies and commodities.
- Real estate we own.
- Money credited to Social Security accounts.
- Jewelry, gold and other valuables.
- Paintings that can sell for higher value.
- Private investments in small businesses.
- Collectibles with increasing market value such as rare stamps and coins, vintage wines, rare whiskies and other spirits.
- Antiques of all kinds.
At the same time, the money you owe or liabilities can also be in several forms.
- Credit card debt.
- House mortgage.
- Loans for vehicle purchase.
- Credit taken to buy household appliances and other stuff.
- Personal loans.
- Money you owe to others.
- Out of pocket expenses on medical treatment for chronic illness.
- Monthly living expenses.
Here, it’s worth knowing that some liabilities don’t directly affect your net worth. For example, out of pocket medical expenses and living expenses are something you can’t do without. They’re essential costs to lead a proper life.
Therefore, these expenses don’t actually impact your net worth unless they’re going to form a significant part of your spending that would increase over a period of years, even while your income doesn’t grow.
What is my Net Worth? Calculating Your Net Worth
You must be asking this question – What's my net worth? How do you calculate your personal net worth? Here’s the simplest way.
At the beginning of this article, I cite examples of Jeff Bezos and Elon Musk and the swings in their fortunes on any given day. The same principle somewhat applies to us for calculating personal net worth.
However, the net worth of billionaires is often calculated on basis of their stocks and other holdings on any particular day. That’s fine because these wealthy persons can lose or gain billions of Dollars within just a few hours when the stock market is open. When prices of the stocks they hold go down, their wealth and net worth drops. And when it rises, their net worth also increases.
Instead, you could follow a simpler way to calculate your net worth. In fact, this is the one I personally use often.
Money You’ve Invested
Calculate how much money you’ve invested over the years on different plans. This includes Term Deposits, cash stashed away in savings accounts at banks and credit unions, investments on stock and currency markets, cryptocurrencies and other financial holdings.
At the same time, don’t calculate the interest you’ve earned or losses and profits on stocks and other stuff. I mean, simply find out the total amount of money you’ve invested over a period of years. The reason: only interest can remain fixed while stocks and other prices can swing wildly.
Furthermore, interest rates can sometimes be so low that they might not match with the inflation and other factors. Hence, the simplest thing is find out how much money you’ve invested in total.
Present Value of House
Regardless whether you’re paying mortgage, find out the present value of your house. And add that amount to the total sum of investments. Because, real estate is also another form of investment. In fact, real estate prices can sometimes soar so high that it would cover the cost of the mortgage altogether, over a period of time.
However, calculating the value of your house can prove a bit difficult. Of course, a realtor would provide you an estimate of the sale value of your house right now. But there can be no projections about how much money it would sell for after you’ve paid the mortgage. And the amount of money you’re paying as mortgage with interest would also matter.
Retirement Plans & Annuities
Retirement plans and annuities will give you some income after you retire. They’re usually long-term plans which will pay either a monthly, quarterly, half-yearly or annual income to meet your living and other costs.
Though putting money on retirement plans and annuities would sound like an expense or liability right now, they’re actually your asset. They will prove very useful when you’re no longer earning an active income. Therefore, the money you’re paying regularly towards retirement plans and annuities also form part of your net worth. Find out how much money you’ve contributed to these plans till today to find out your net worth.
Bonds, Gold & Jewelry
If you own bonds, gold and jewelry, they’re also part of your net worth. Get these valuated to find out how much money you’ve invested on bonds. And how much money you could make if you sell your gold and other valuables right now. Gold prices tend to go up and down regularly. Therefore, calculate your valuables according to the present market value only.
Finding gold prices can be a bit tough. Because, in some cases, you might have inherited it from a relative. Or bought it at a cheaper rate. Generally, gold prices are calculated on 24 carat basis only. If you’re having 22 carat gold jewelry or 18 carat ones, pricing can prove a bit tricky. But you can easily get them valuated from a jeweler online.
Cost of Other Holdings
By other holdings I mean collectibles, antiques and other stuff that you own and can fetch a good price if you were to sell. How much did you pay for this stuff? Or were they just lying around in the house when you bought it? There’re a lot of stuff that we falsely believe is junk. Instead, it could be something priceless such as a rare picture or postage stamp, a unique or one-off mint coin or even some vintage machine.
There’re countless cases where people have stumbled across stuff they believed was useless and sold it for a song while buyers could make a fortune. This means, you’ll never know unless you get it curated and valued from an expert. I remember reading that someone once found a crate of whisky bottles only to learn they were the only ones surviving from a now defunct distillery. These bottles fetched a fortune.
Adding & Subtracting for Your Net Worth
Once you know all the above values, finding your net worth becomes simple. Now subtract all the credit and debt you have. And what you’ll be paying in future since mortgages and some forms of debt can be long. Once you add your investments and savings as well as other things and subtract debt and credit, you’ll arrive at some figure.
And that figure is your present net worth.
Now this can come as a shocker for quite a lot of folks. Often, totaling your assets and subtracting your liabilities can leave you with a figure much smaller than you would’ve imagined. And that low figure could be your real net worth.
Importance of Personal Net Worth
Obviously, it’s disappointing when your personal net worth seems low or not what you would expect. And in some cases, you might find the net worth higher too. One way or the other, there’s no reason to be unhappy or rejoice.
If you’re net worth high enough, find out how much you would be worth before retirement. To do so, use the Time Value of Money calculation. Basically, TVM means that your money loses value over a period of time.
And if your net worth is lower than expected, you can find ways and means to step up income, savings and investments. About 76 percent of Americans believe they don’t have enough money for retirement. Unfortunately, most of them don’t even take steps to correct this situation by stepping up income by freelancing or side-gigs.
Therefore, knowing your net worth is very important. It helps you plan savings and lead a better life, while preparing well for retirement. It could also help you realize that your present savings and investments aren’t enough. This could encourage you to rethink your lifestyle and find a side-gig or part time work for earning more money.
Obviously, finding out your net worth can be scary. It exposes our own financial standing and sometimes, exposes that our savings and future plans are inadequate. At the same time, calculating your net worth is an exercise everyone should take at least once a year. Though it might throw up some unpleasant surprises, it can help you patch every grey area in savings and investments while helping you gain the much necessary financial security.