When people get started on the road to paying down debt the main number they focus on is their current debt total and how quickly they can get it lower which is absolutely what they should be doing and it is a very exciting number to see going down, BUT, what if I told you there is another very exciting figure that it’s worth keeping track of that you’ll actually see going up as your debt balance goes down without having to pay money into savings…sounds like magic right?
It also sounds like a really niche riddle – “what financial metric goes up in value the more money you spend putting towards debt’ 😂
This magic number is your net worth and it is one of my absolute favourite things to track so today we’re going to look at net worth – what it is, how we work out our own net worth and what to include in it.
What is Net Worth?
Well put simply, your net worth is what you OWN minus what you OWE.
To talk about it in more finance-related terms we’d say you get your net worth by subtracting your liabilities (debts) from the sum of your assets. Liabilities are anything you owe money on so a mortgage, any loan (bank/car/student/family), credit card and assets include any positive account balances you have – things like savings and current accounts, pension accounts and anything that holds a monetary value which includes times such as houses, cars, jewellery, high ticket items and personal property.
If the value of your assets exceeds your liabilities, you have a positive net worth. If your assets are worth less than your liabilities, you have a negative net worth.
Why is Net Worth important
Net worth is a metric that is often used to calculate financial ‘health’, a positive net worth is great and a negative net worth just means it needs some improving on. (don’t worry if this is you, we go into how to improve your net worth in another post soon 👍)
If you’ve ever delved into the #debtfreecommunity on Instagram you’ve probably seen a few people posting about their net worth and the fact that they track it regularly. Tracking your net worth is a valuable exercise because it helps to give a snapshot of your financial situation and the direction it’s heading in.
Personally, I find it a very fun metric to track when you are on your debt-free and wealth-building journey as it means you can set yourself some really tangible goals.
What should you include in your net worth
Let’s look at assets first
- Your home or any properties you own – you ideally want to find the current market value of the property and use this number (this isn’t always an easy number to find but a good way to estimate it is to go on to Right Move and use the ‘price comparison report‘ tool, it obviously won’t be 100% accurate but it’s going to give you a rough idea of your home’s value)
- Vehicles – it’s important that we look at the current market value of a car as a private sale, not the prices that car dealerships state, as the private sale price will be higher. An easy way to do this is to look at Auto Trader and chuck in your car’s details and look for the price of current private sales.
- ‘Liquid’ Assets AKA Current and Savings accounts – A ‘liquid asset’ is something you can quickly and simply be changed into cash whilst keeping its market value so we’re talking about anything that you have easy access to. Have a look at your online banking or current statements to find the current value of all your current accounts, savings (include emergency funds, sinking funds, ISAs) and add them into your calculation.
- Pension Pots -If you have, or have previously, paid into a private pension you will likely get a statement through each year showing you what your current pension pot is worth. The majority of private pension providers have now moved to an online system so if this is your first time tracking your net worth it might be a good time to register for online access to be able to see these accounts in ‘real-time’ and gain a more accurate idea of where exactly your pot is at. Pensions aren’t considered a liquid asset as you generally don’t have access to them until a certain point in your life (retirement) and if you did have the option to remove money from them prior to that point you would likely incur a penalty which means it hasn’t kept its market value.
- Personal items of value – this is a bit of a tricky one because you could go through and add a monetary value to everything you own down to your prescription glasses and say it’s an an ‘asset’ but in reality, we’re only interested in things that would bring a decent amount of value if you sold them – if you really needed the money then, of course, you could sell everything you own BUT if you needed the money that desperately it’s likely we wouldn’t be having a conversation about net worth in the first place. So with all that being said I generally say you’d only count items in your net worth that are above a certain saleable (not what you paid for it, what you could sell it for) value, say £500, or items that you would include on your contents insurance in the section where they ask if you have any individual items to insure.
To give you an example, our musical instrument collection as a whole would be worth a fair amount of money but individually nothing is probably worth over £300, if Dean owned a vintage guitar though that was a collector’s piece we’d include that as a one-off item that would contribute to our net worth. Some people might have family heirlooms or jewellery, maybe a collection of designer shoes, art or collections worth a substantial amount (coin collections for example) these are all worth considering adding to your net worth calculation.
- Small Business Inventory and equipment – this won’t be something that is relevant to everyone but we all know how much I love a side hustle and starting small businesses! It’s also worth thinking about stock or equipment value if you own a business.
To give you another personal example – the company I created with my sister, Bang On Blanks, holds a lot of stock of things such as blank water bottles, individually they are only worth a few £’s but when you have a warehouse full of 10,000+ of them they become a valuable asset and they are items that could be sold off quickly and turned into cash if needed. If you then add in the range of machines and tech (that all hold a decent resell value) used to facilitate the creation of some of the products you end up with quite a sizeable sum of liquid asset net worth in a small business.
When it comes to liabilities you want to try and have as accurate a number assigned to each one as you can, this is usually fairly simple to do nowadays thanks to online banking and apps. You should include the following liabilities in your net worth calculation
- Mortgages – you want to look at how much you currently owe the bank for you mortgage at this moment in time, not the amount you originally borrowed or the full amount you’ll end up paying back with the interest included, our net worth is a snapshot of where we currently are so we want the current value of the mortgage debt.
- Loans of any kind – we’re talking car loans, family loans, small business loans, home equity loans – anyone you owe money to that you need to pay back.
- Credit Card debt – this is the same as with the other liabilities, we want the current figure of credit card debt that you owe. This is nice and easy to do, you can just call the number on the back of your credit card to get a current balance value or log into your online account.
What about student loans? This is a hotly debated topic as the student loan system in the UK is a lot different from other countries. Firstly, we don’t start paying back our student loans until we hit a certain earning threshold and secondly, they can get written off after a certain amount of time – the Gov.uk website has a ton of information that can help you make an informed decision. I personally don’t have student loan debt as I didn’t go to university so it’s a hard subject for me to weigh in on.
How to calculate your net worth
Now, this is the fun bit and it’s really simple maths! As stated before net worth is the total sum of what you own minus the total sum of what you owe.
Assets (stuff you own) – Liabilities (stuff you owe) = Net Worth
The quickest way to work of all of this out is by grabbing a pen, some paper and maybe a cup of tea or coffee and spend a few minutes just logging into your online accounts/digging out some paperwork or making a quick call to get you numbers. All you need to do is jot them down into two columns, on one side of your paper we want your assets and on the other side we want the liabilities. After you have all the numbers add each colour up and then subtract your total liability number from your assets, the end figure is your current net worth – it really is that simple
Net worth Calculators and tools
Don’t fancy the pen and paper method? No need to fear there are plenty of calculators online that can do the math for you, here’s some of the net worth calculators and comparison tools I like –
- Basic Net worth calculator – nice and easy with this one, just chuck your numbers in and it’ll do the math for you
- Where do you fit in with your net worth – this calculator isn’t as advanced as the one above but it gives you an estimation of where you fall in line with the rest of the country with your net worth
- In-depth Net worth calculator – this one goes a bit deeper and breaks down the liabilities and assets even further it includes some bits we haven’t mentioned above and would be a very thorough overview of your net worth
- What’s your share of the pie – this is a really interesting tool, it doesn’t necessarily deal with your net worth but it looks at where you think you fall in comparison to the rest of the nation. It asks some interesting questions about wealth distribution and taxes, at the end of the ‘quiz’ it shows you where your answers fall in relation to other people and also the real-life statistics.