Net-worth: Are you financially fit? 🏄 🚴

When did you last check your financial health? Most of us actually never did!

Financial planners say the best indicator to look at your financial health is the net worth. But what is it exactly?

The net worth gives you a snapshot of your personal financial situation. Over time your worth will change as your assets and liabilities move (earn interest, repay debt, etc.) so it is a good indicator to monitor. It is very easy and quick to calculate and is really a necessary step towards financial independence.

Let’s look at a simple example below...

What is net worth?

By definition net worth equals your assets (what you own) minus your liabilities (what you owe). We always think financial health in relation with our salaries but the fact is: the salary is only a mean to build your net worth. Net worth will tell you how much you have left once you sold all your assets and repaid all your liabilities. Hopefully this is a positive number!

Tip: If you are at the beginning of your career, you may be better off focusing on your salary and once you have some money on the side, you can start looking at your net worth!

This is a simple example of how to calculate it:

My Assets

My Debts/Liabilities

House, flat = £300,000

Mortgage = £200,000

Bank accounts balance = £5,000

Credit card debt = £5,000

Savings = £20,000

Student debt = £20,000

Shares, investments, insurance = £0

Other personal loans = £0

Car = £0

Car loans = £0

Other assets = £0

Other Liabilities = £0

Assets = £325,000

Liabilities = £225,000

Net worth = £325,000 - 225,000 = £100,000

The value of your assets have to be accounted for at “market value” (value if you had to sell the asset today, i.e. at current price) versus “book value” (price you paid for the asset).

Stat: The net wealth of UK households grew by an estimated £1.5tn in 2014 on the back of rising property prices and investment values, breaching £9tn for the first time. Research by Lloyds Bank Private Banking concluded that average household wealth grew to £326,414 at the end of 2014, rising by an inflation-beating 75 per cent since 2004. The retail price index measure of inflation rose 31 per cent over the decade.

Why is it important?

Net worth is a good indicator of your financial health. If it is increasing, you are getting financially fit! It is an indicator that is easier to look at rather than many hard numbers going up or down on your bank statements. It gives you the big picture and help you see if you are navigating in the right direction.

But what if my net worth is negative? Don’t panic. It is a good start to see what can be improved. One of the reasons is that you may have student loans and just started working so at the moment it is important to start building this wealth by saving or repaying your loans.

How often should I look at my net worth?

Some people recommend to look at it on a daily basis, but we find it useful to calculate it monthly. Your objective is to see your net worth increasing from one month to another. This means you either managed to stash money on the side or repay some of your liabilities.

What should I do to grow it?

There is really only two ways to see this net worth number increase. And it will take small small steps. Every time you manage to increase your assets or decrease your liabilities by a little bit, it helps improving the net worth number. In practice, you can look at the following:

  • Repay your debts: Focus on repaying the “expensive debts” first, i.e. those that are generating the highest interest rates, such as credit cards debt.
  • Save some money: Open an ISA if you don’t have one already, it is the most basic and tax effective saving account and start putting money aside every day or month.
  • Top up your pension: If you are not contributing to your employers or personal pension, start now!
  • Reduce your spending: calculating your net worth can help you identify where you spend too much money and cut some bad habits
  • Start investing.
  • Be patient

Building net worth is a long process and does not happen overnight. But the big advantage of tracking net worth is that it gives you an accurate and real picture of where you are financially.