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If you’ve hung out in any personal finance community for a minute, you probably know that the end goal is growing your net worth.
Every strategy, every tactic, every conversation can be traced back to this one big goal: increase your net worth.
There are milestones you’re supposed to achieve. The first 10K, the first 100K, the first 500K, the first million, and so on.
You’ve probably even looked up the net worth of your favorite celebrities by searching on Google. Or you’ve looked up the Forbes List of richest people of the year.
But really, what is your net worth and should you really care about it? And how do they fit into your money goals?
What is Net Worth
Net worth is just a simple equation: Assets minus Liabilities.
Put other way, it is what you own once you account for all the debt that is owe is subtracted from it.
Or how much cash you would get once you sold all the things you owned, and settled all the money you owe.
Net worth is a widely used metric in personal finance.
Most people are looking to increase their net worth. And they should.
But it is important to consider looking beyond that one number. Really diving into what is making up your net worth.
Delving into and really understanding the drivers that help your net worth grow or shrink, can help you understand how to maintain, protect, and even grow your own net worth.
As a quick review, you should consider any and all financial assets and liabilities into your net worth calculation.
What you own as well as what you owe, might be scattered across several accounts, platforms, and banks. It is helpful to have a consolidated list of of the items that make up your net worth.
Here are some examples that may apply to your financial situation:
What you own
- Money in your wallet
- Bank accounts (chequing, savings, other)
- Investment Portfolio – stocks / bonds / GICs / T-Bills
- Retirement Portfolio
- Real Estate (including your home, and any other property)
- Art or other investments
What you owe
- Mortgage debt
- Credit card debt
- Lines of credit
- Student loans
- Margin accounts
Net worth: A Snapshot
You can probably quickly calculate your net worth. And you might already be tracking it to monitor whether your net worth is growing or shrinking.
Now that you know what your net worth is, it is important to remember that this is a number at a point in time. It is merely a snapshot of your financial situation at any given point in time.
Depending on what your net worth is made up of, it might be constantly going up and down. Or you might not even know the exact value of something until you actually sell it!
If you are invested in the stock market, the prices of those stocks might change daily. As a result, your net worth will change daily if not more frequently.
If you own real estate, you probably could estimate the value of your property. But because of the nuances and often subjectivity involved in real estate prices, you might not know the true value of it until you actually try to sell it or there is an actual buyer who wants to buy it.
Quality of your Net Worth
What makes up your net worth matters.
The quality of the items included in your net worth can affect the stability or safety of your net worth. And how you can ensure that you can protect your net worth.
In an extreme scenario, someone’s net worth might have shot up drastically because they made an investment in a penny stock that returned a 1000% overnight. Yes, that would mean that their net worth increased. But until they sell those stocks, the value is not protected. And it might be especially important if such risky stocks make up a significant value of their portfolio.
It is important to note what makes up your net worth, in order to protect its value.
Some examples to consider:
Investments: Are there items that make up a chunk of your net worth that are volatile in nature. Are they constantly going it up or down?
Debt: Is there high-interest debt, that will continue to climb (like 18%+ for credit card debt), until it is paid down. This could have a detrimental value to your net worth.
Consistency of your Net Worth
If your net worth fluctuates constantly, consider whether you are comfortable with that financial stress.
For some, fluctuations in net worth might be a trigger for daily stress.
For others, the fluctuations may not matter. They may have a much bigger net egg, or they’re a lot younger and have a higher salary or another source of income.
If there is a lot of volatility in your net worth, month to month, one strategy to consider is diversification. There might so that there is less risk of losing your net worth.
Diversity of your Net Worth
The old cliche of don’t put all your eggs in one basket is a cliche, but an important lesson in finance.
For many people, a portion of their net worth may be tied into their employer plans – which is also the same party paying them every month. Consider the risk. If you have the ability to diversify, this might be one area to consider.
Or if the largest contribution to your net worth is your home, should you consider investing in other types of investments like the stock market to diversify your returns.
Liquidity of your Net Worth
In order to invest, you need money. But consider whether you would have access to the funds if you need them.
How accessible is your net worth? Is all of it in real estate or another investment that cannot be touched?
Is your net worth generating cash flow? Maybe you cannot touch the actual investment without penalty (like certain bonds) but you might be receiving a cash return every month.
Can you access a portion of your net worth in the event of an emergency?
It is important to have a healthy cash flow, especially if the majority of your net worth is invested in investments that cannot be easily accessed, like a business, or real estate.
Protect your net worth
Evaluating the quality of your net worth can help you grow your money, and reduce any stress related to your financial life.
Yes, your money should be invested in order to build wealth, but you do need some of it to be liquid (aka easily accessible), in the event of an emergency. If your net worth is maybe not growing as fast as possible, because of high-interest debt, this might be an opportunity to make a plan to pay off that debt.
Evaluating your net worth can help you protect it from losing value, and understanding what is growing or shrinking it can help you grow your net worth constantly, instead of being hostage to the random valuation.
Do you monitor your net worth, and what it is made up of?