Net Worth – My Current Take

Net Worth – My Current Take

What is this Net Worth thing?

Net Worth is the most common measure of an individual or family’s financial wealth, measuring only income in isolation is flawed. There are many resources which can assist in the calculation of net worth with many people sharing their journey on how they grew their personal net worth in most cases in order to achieve financial independence. There are some very good resources on the growth rate of your net worth or what it should be for the really good personal financial wealth manager. Remember this can be massively different between countries based on GDP per capita, cost of living, socialist retirement practices etc. But in a nutshell:

Net Worth = Assets – Liabilities

Really simple huh? Below I have illustrated our family’s current net worth. Everything is stated as a percentage to give you a better idea of the state of our net worth and to be more relevant to all readers. I have also found looking at net worth in this manner makes it easier to make decisions and set goals on growing your net worth. For example saying “I want to save 6% of my net worth every year” or “I want to have my investments grow my net worth by 10% this year”. One important distinction is that I have split assets between “Fixed” and “Current”, which can be classified as liquid or investable assets.

Comparisons can be deceiving

This is where my first gripe with simple net worth comparisons start. The average American has over 90% of their net worth tied into real estate, most probably their primary residence. In many developed countries, this can be even worse and acquiring a property is so difficult that most people rent or have exuberant mortgage periods. A financial advisor once told me you cannot buy bread with bricks. This is very true; therefore, this is my take on what I want to achieve with our net worth this year in order to grow our financial wealth. Bear with me, if you are reading this you are probably already quite a savvy financial wealth manager. I believe this can be very beneficial for people who is also pondering large decisions like buying a new fixed asset.

What’s the plan?

The steps are very simple:

  1. Reduce our debt, this is one thing I am really passionate about and very straight forward. Reducing your debt automatically tips the net worth scale. Luckily this happens on a monthly basis as we pay instalments on our vehicles and mortgage. Unfortunately, these vehicles also reduce in value over time and has a limited lifespan.
  2. Keep our fixed assets stable. By this I mean try not to purchase a new house to live in (which we are considering, but more on that later) or a vehicle. Some items will grow in any case as I continue to contribute to my retirement fund and some of these assets grow in value. Some items might fall into this category like a rental property which is seen as a growth asset which provides passive income. It depends where you are in your financial independence journey and what your financial wealth goals are.
  3. This is the kicker for me. This is where I believe we must aggressively try to increase our net worth allocation, especially as our current aim is growth of net worth and not preservation since we have not yet won the game. Everything in this category must be aimed at growing our net worth, if it generates passive income it must ideally be reallocated to these growth assets. The other big advantage of this is that our assets can be far better diversified and are liquid. Both of these are important living in a less stable country by ensuring you protect against potential in country risks while having better access to your capital. This is something I would recommend to any South African or anyone living in similar conditions.

Taking this approach to your financial wealth management is very advantageous in visualising the state of your wealth while being very satisfying if you see it going the right direction.

Some of my personal tips for your net worth calculation:

Do not state the direct value of your property but the value that you will receive if sold after taxes, transfer costs and agent commissions.

  • Your retirement savings cannot be stated as a current asset. In most countries, you do not have access to these savings before a certain age or if you access it before this age you are heavily taxed (avoid this at all cost). If this is not the case it can be seen as a current investable asset.
  • Be pessimistic about your cars’ value in the fixed asset column and realistic about the outstanding debt in the liability column. It is difficult to reflect the true value of your vehicle and in many cases there are penalty costs if financing or leasing is terminated before the full term.
  • In my opinion do not add any asset to your assets column if you are not willing to sell it. Examples like furniture and appliances are not things you necessary want to live without and only makes your net worth look better than what is actually is. It also clouds the true reflection this exercise should provide you with, therefore making you focus on the wrong items to address.

What is your thoughts on net worth and this methodology?

Always grow your wealth for tomorrow while being content with your wealth today.

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