What is Your Net Worth?

The work ‘net worth’ is bandied around in many circles including the swell of Financial Independence movement (or FI/FIRE/FF) but what it is, why is it important AND how do you calculate it?

For me, this is the true indicator of someone’s financial well being.

It is a specific number that identifies that if you sold everything you OWNED (assets) today and paid off all of your debts (liabilities)...do you have any money left over?

If you end up with a positive number, once you have sold everything you will still have some money left, however….

If your calculation results in a negative number, this means you will still owe DEBT.

This usually occurs with DEPRECIATING assets, like Cars – you buy a car for $50k and when you go to sell it in 3 years' time, its only worth $25k, but you still owe $35k…..hence when it’s sold, you not only don’t have a car anymore, you still owe $10k!

Asset $25k – debt $35k = -($10k)

This measure is also my favourite, because it’s a more stable indication of your progress to financial freedom and just because someone earns more money than you (or vice versa) doesn’t mean you are financially better off….for example.

Let’s pretend your neighbour Hannah is an IT guru who makes $150,000 a year and has a net worth of $20,000.
You on the other hand are a Nurse who currently makes $65,000 a year and has a net worth of $250,000.
Who has more wealth—the IT Guru or you the Nurse?

You got it.

YOU actually have more wealth because you have a higher net worth than your neighbour Hannah!

- Coach Rach