The current climate in South Africa is getting more and more unstable by the second and consumers are often left wondering what the state of their financial situation will be in the next few years. It is always a good idea to do a stock take of your assets (remember that policy you took out ten years ago) and your liabilities (and how could you forget about your car instalments every month). Many financial savvy people are starting to look very carefully at what their net worth is in order to get a better grip on the economic aspect of their lives.
What does net worth mean?
Net worth is not something that only celebrities have. All of us have some form of net worth that can be calculated. Simply put, your net worth is basically all the important and significant things you own (assets) minus what you owe in debts (liabilities). Assets include cash and investments like your house, other types of real estate, cars that you have paid off and anything else that belongs to you. Liabilities, on the other hand, are what you owe on certain assets. This includes car payments, your bond and loans.
Your net worth is a measure of your financial health. It shows a certain amount that you will have leftover if you had to sell all of your assets in order to pay all of your debts. Every financial decision that you make should be aimed at improving or increasing your net worth. It doesn’t help you fall into more and more debt. That would be like going to the gym but eating burgers and pizzas afterwards. It is definitely not healthy. In order to increase your net worth, you should aim at either increasing assets or decreasing liabilities.
Why is it important to calculate net worth?
Knowing your net worth gives you greater control over your financial life. Unfortunately, we live in a time where no one can afford to be ignorant when it comes to their finances. The money you spend on so-called ‘sales’ because you happen to see the online banner or spending unnecessary money on monthly accounts are all examples of irresponsible financial behaviour and it is definitely not the right step in increasing your net worth. Knowledge is power. Always.
The importance of calculating your net worth will assist you in determining a few things. Firstly, it tells you where you are in your life financially. Then it allows you to question your status and you are forced to ask yourself how you are going to get where you want to be. This can give you the encouragement you need to continue heading in the right direction or to give you a wake-up call if you have taken the wrong turn. From there you can then review the decisions that you are currently making and devise a plan of action in order to improve your finances.
How to calculate net worth
There are many online calculators that you can use to determine your net worth, but old school is still cool, so grab a piece of paper, a pen, and a calculator if you are not mathematically blessed.
Step 1: Make a list of all your assets and their estimated value
Your assets should include your retirement annuity, your savings account, your checking balance, any bonds that you might have, the total value of any stock holdings you might have, your home, and your cars.
Some of these assets, like your bank accounts, will have very obvious values, but many of them you will have to calculate. There are online sites that can help you in your calculations, but these figures should not be taken seriously. They are simply there to give you a ballpark figure. If you want a more serious quote for your house, for example, you will have to get help from a real estate agent that can perform an evaluation.
It would be easy to make a column where you list your assets and then a separate column next to it where you will write down the values. At the end of your list, you can write the total of all the assets combined.
Step 2: Make a list of all your debts
This is the less fun part so try not to keel over from pure shock when you see the damage your liabilities are doing to your bank account. Sometimes writing it down on a piece of paper is more realistic than seeing the debit orders come off your bank account.
Your debts should include all credit cards, personal loans, student loans, car loans, home loans, and so on. Try to be as accurate as possible with the debts. It should be easier than the assets because you will be working with physical numbers.
As with your asset list, draw a column and start listing your debts. A separate column can be drawn where you will then fill in the relevant amounts. If you want to be really fancy and you can’t stand the vintage way of doing things, a spreadsheet also works just as effectively.
Once you have listed all your debts, you can write the total at the end of your list. This will then be the total amount of your debts.
You might be tempted to throw these lists away, but keep them somewhere safe. Having a list of what you owe and what you own will make things much easier in the future.
Step 3: Subtract
And now you simply subtract your total debt from your total assets and hey presto! You’ve just calculated your net worth.
An illustration, for your viewing pleasure
The theory is simple enough, but here is an example to illustrate what net worth looks like when working with actual figures:
Richard is a 35-year old male. He owns a home of R1.5 million but he still owes R1 million on the home loan. His five-year-old car is worth about R90,000 but he has paid that off. He has R5000 in credit card balances, R180,000 in his retirement annuity, R5000 in his savings account, and R17,000 owing on his student loan.
This is what Richard’s net worth will look like:
- Home: R1,500,00
- Car: R90,000
- Retirement annuity: R180,000
- Savings: R5000
TOTAL ASSETS: R1,775,000
- Credit cards: R5000
- Student loans: R17,000
- Home loan: R1,000,000
TOTAL DEBTS: R1,022,000
NET WORTH: R1,775,000 – R1,022,000 = R753,000
Richard has a positive net worth which is ideally what every person should strive to achieve. Don’t freak out if you have a negative net worth. This is usually a sign that you are a younger earner with a larger student loan. You just haven’t made enough money to overcome the weight of your debt. It will fix itself in due time.
However, it could be the result of over-borrowing, if you are already working. If you have been feeling a bit generous with your credit card, you might have racked up more in your liabilities column than you should. You should pay careful attention to that and try to bring it down.
It is useful to calculate your net worth about once every month so that you continue reaping the fruit of the financial tree.
Update: A reader has pointed out that Old Mutual has a service called 22seven that allows you to work out your net worth online. It syncs all of your accounts in one handy place to see your financial state instantly. It is safe because it can only read your data so it cannot spend any of your funds.