When it comes to financial fitness, you may already be aware of the importance of your credit score, saving for retirement, and you may have TFSA and RRSP accounts. But determining your net worth is another important tool in the equation, even though it sounds like a term only used for celebrities and the ultra-wealthy.
Knowing your net worth is an important tool in wrapping your head around what kind of financial shape you’re in. Your net worth isn’t what you earn in a year; rather, it is the value of your total assets minus your liabilities. In simple terms, it’s the total of everything you own minus everything you owe.
It might seem overwhelming and stressful to put a number on what you’re “worth,” but think of it as something to work towards and build up strategically.
Why you should know your net worth
Whether you’re making money, saving, or spending it, Ellen Murray, Senior Financial Planner at Westoba, says it’s important to know your net worth to help frame your decisions down the road. “If you have a specific target you’re working towards, you may think twice about making a purchase you don’t necessarily need.”
Knowing your net worth also offers you the opportunity to look at your current investments, liabilities, and savings to see what is and isn’t working for you. “Your Westoba professional advisory team can help you take a snapshot of your net worth today and determine strategies to help you meet your future goals,” explains Murray.
Armed with this information, you will be better positioned to make sound decisions for where you are today and in the future. Avoid comparing yourself to others, looking at any measuring sticks or “average” net worth figures for people your age. Looks can be deceiving – someone can look like a million dollars, but in reality, everything they own was borrowed through credit and loans.
Instead of comparing yourself to those around you, focus on your goals and what YOU can do to boost your net worth by making the right financial decisions for you, your family or business.
How to calculate your net worth
Before you work through the process of determining your best worth assets and liabilities to calculate your net worth, let’s go through what falls under each bracket: Assets are anything of value that you could turn into cash, such as investments, bank accounts, brokerage accounts, retirement funds, real estate, and personal items like vehicles or jewelry. Liabilities include things like your mortgage, loans, credit card debt, student loans, and any other debt.
Assigning accurate values to all your assets could be a challenge. “Lean towards the conservative side when calculating the value of your assets to avoid inflating your net worth,” says Murray. It may also be helpful to get jewelry appraised or consult with your realtor about the value of your home, which for most people is their biggest asset.
Now you’re ready to crunch some numbers. In simple terms, if you own $300,000 in assets and your liabilities total $200,000, your total net worth will be $100,000. Conversely, if your assets total $200,000 and your liabilities equal $300,000, your net worth will be minus or negative $100,000. Having a negative net worth doesn’t mean you are fiscally irresponsible, but rather that right now, you have more liabilities than assets.
This calculator is a great tool to calculate your net worth.
How to calculate your target net worth
Your net worth will fluctuate over time, but the importance is the trend of your net worth over the years, rather than the exact number. As you become more financially secure, your net worth will ideally trend upwards as you pay off debt and build your wealth.
Murray explains why there is no generic target net worth. “Every person is unique, and rather than trying to strive for what might be an unrealistic target, it’s important to determine your current financial situation, future goals and your own personal ideal net worth.”
As a starting point, here is a formula you can use to calculate your target net worth:
Target Net Worth = [Your Age−25]∗
[51 ∗ Gross Annual Income]
For example, a 40-year-old with a gross annual income of $75,000 might aim for a net worth of $225,000 ([40 – 25 = 15] x [$75,000 ÷ 5 = $15,000]). Again, this does not mean that every 40-year-old should have a net worth of $225,000! This is simply a starting point to be adjusted according to your lifestyle and goals. This Forbes calculation tool helps you project your net worth 10 years down the road.
How to reach your goals
Now that you know where you are, and where you want to get to, there are tips and tricks you can implement to reach your goals faster and grow your net worth.
1. Spend wisely
Seeing your net worth on paper can be eye opening and make you think twice about unnecessary purchases. It can be hard to distinguish between wants and needs at times, but with your goals and targets in mind, it can make it easier to put down that $500 watch.
2. Pay down debt
Reviewing your liabilities can help you put together a plan to pay down debt and perhaps reallocate some assets to pay off some debts. Paying down debts with higher interest rates may benefit you in the long run, even if it means sacrificing some cash in the immediate.
3. Save
Checking in on your net worth on a regular basis can help you identify a negative trend early so that you can make a few corrections to get back on track. It can also be very encouraging to see your net worth grow and know that what you’re doing is working. Your goal is always to accumulate assets and decrease liabilities.
Think of building a long-term plan to grow your net worth much like following a workout plan; it takes time and dedication, but in the long run you’ll build muscle and make progress. Similarly, with consistent saving and paying down debts, you’ll grow your assets and decrease your liabilities, thus building your net worth. There are no shortcuts and no quick fixes! Your Westoba Financial Advisor is here to help build a plan tailored to you and your goals.
Call 1-877-WESTOBA to make an appointment with our team or email below. We’re mobile and will meet wherever you like! We believe in making the process as simple as possible.
