In this lesson you will learn 💸
- How you can calculate your net worth (and why do you need to?)
- The differences between fixed and variable expenses
What is a 'net worth'?
Net worth is essentially the sum of everything you have earned and received, and everything you’ve spent, borrowed, or given away.
Working it out isn’t too difficult, but you’ll probably need to spend some time looking through paperwork to get the figures you need.
Let's start with some definitions you might need:
Assets & income
‘Everything you own’ is known as your ‘Assets’, and this includes money in your bank or savings accounts, your home, personal property or art, any insurance policies you have in place, your pension, investments, and so on.
Your assets include your ‘income’, for example your salary, as well as investments and interest on savings accounts.
Liabilities & expenses
‘Everything you owe’ is known as your ‘Liabilities’, and it’s the opposite of your assets, including the balance on your credit card, the mortgage on your home, any loans you might have taken out, or money you owe to friends and family.
Your expenses will go towards paying off liabilities or smaller bills, and there are two types to be familiar with:
- Fixed Costs: these are the same cost from month to month, such as car payments or your mortgage
- Variable Costs: you usually decide how much you spend each month, such as for eating out or going on holiday
Meet Chloë🦸🏻♀️
Chloë owes:
- a home worth $250,000
- a retirement pot worth $30,000,
- an investment account worth $10,000
- a car and some other things valued at $5,000
Her liabilities include:
- an outstanding mortgage balance on her home of $170,000
- a student loan of $20,000
- a loan from her grandmother of $10,000
What is Chloë's net worth?
$95,000
(250k+30k+10k+5k - 170k+20k+10k)
What does it mean if my net worth is positive or negative?
If your net worth is positive, that means you own more than you owe, which is good news. 💃🏼
If it’s negative, that means you need to focus on debt repayments or other strategies to earn money - the good news is that that’s exactly what your financial plan is there to help you do. A negative net worth it is not uncommon when you are young due to student loans, mortgage payments and usually a lower salary compared to later in your career.
Your action 📝
Now the documents you have collected in the previous chapter will be put to use 😉
1. Calculate your net worth - you can do this either using an online calculator (simply search for net worth calculator) or with the SmartPurse Net Worth calculator below.
2. Set a reminder for yourself to look at it again 1 year from now.
Net Worth Calculator
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How often should I re-calculate my net worth?
It’s a good idea to recalculate your net worth every year or so, to see what kind of progress you’re making on your plans. Why not set a reminder on your phone right now? 📆
Tip 📌
In line with your net worth, you’re starting to think about how this relates to your income and expenses.
Why not take a look at your variable expenses in more detail? You could begin weeding out any expenses that aren’t necessary, thereby increasing the amount you have available for saving, investing and your financial goals.