Abu Dhabi, UAEWednesday 1 April 2020

Why knowing your own net worth is so important

While not everyone enjoys tracking their finances, Zach Holz says this number is vital for your future

Your net worth is simply how much you are worth, from a financial point of view. Getty Images
Your net worth is simply how much you are worth, from a financial point of view. Getty Images

I'm a bit of a numbers geek and, for me, graphs and spreadsheets about my finances are fun. I analyse data and draw conclusions to pass the time. As you can imagine, I'm super fun at a party.

I can tell you how much I spent on groceries in January of 2016 in a blink of an eye. Want to know my savings rate for September of 2018? The answer is 67 per cent – but who's counting?

Your net worth is simply how much you're worth, in a financial sense. It's certainly not the whole picture of your worth as a human being.

Zach Holz

You might not want to delve as deeply into the minutia of your finances and that's OK. But if there's one number you must keep track of in your finances, it's your net worth.

Your net worth is simply how much you're worth, in a financial sense. It's certainly not the whole picture of your worth as a human being; for example, it doesn't care how much joy you bring to others through gestures such as bringing home-made cookies to the office. The number is cold and hard and cares not a jot for the squishier elements of life.

What it measures is your assets minus your liabilities. This can be a very simple or complicated number to figure out. My method is definitely on the simpler side, but first you need to understand what assets and liabilities are.

An asset is cash or something that makes you money. If you have investments, those are assets, and they're even better if they are liquid, which means you can easily turn them into cash. If you own an apartment that you rent out to others, that's an asset. If you are an Uber driver and you use your car to make money, that's an asset too.

Your clothes are not assets and the car you use to drive to work is not an asset though that can be debatable as it can be considered as a depreciating asset.

Liabilities, on the other hand, are things that cost you money. Money you owe other people is a liability, such as credit card debt, student loan debt, a car loan and maybe even your mortgage on the house you live in (but again, that's a debatable one).

So, let's do a quick calculation to show you how to figure it out. I'll use nice round numbers to make it easy. Let's say you have Dh100,000 invested in low-cost index tracker funds, Dh50,000 is sitting in cash in the bank, and you have paid off a mortgage on a rental property worth Dh200,000. This means your total assets are Dh350,000.

Then in the liability column, let's say you owe Dh40,000 in credit card debt and you have a student loan of Dh60,000. Your total liabilities will equal Dh100,000. Your net worth would therefore be Dh350,000 minus Dh100,000, which equals Dh250,000.

Now that you know how to calculate it in a simple but useful way, here are a few reasons why it's important to know this figure.

• It's how you calculate when you can retire

When your net worth is 25 times your yearly expenses, you are technically financially independent. You can then go and tell your boss to jump in a toxic lake and do nothing but crossword puzzles for the rest of your days, if that's what inspires you. Or you could continue working, safe in the knowledge that you don't have to.

• It allows you to see if you're making progress towards your financial goals

If your net worth is going up compared to last year, you're making progress. If it's going down, something needs to change so you don't end up with nothing.

• It can help you see if your money is invested the way you want it to be

If all your money is sitting on the sidelines, not invested, it's not helping you progress in your financial journey. If your credit card debt is getting bigger, it will show up in your net worth calculation.

• It makes you be honest with yourself

It may also spur more thought into what is going well or poorly for you on a financial basis. It's a bit like a yearly (or quarterly) check-up at the doctor.

For me, as a finance geek, I calculate my net worth every month when I get paid. Then I do a bit more of a deep dive every three months. After all, if you don't track it, you can't fix it.

There are even apps that do this automatically. Personal Capital is very popular in the United States, and Pocketsmith has a paid app that can use multiple currencies and accounts from around the world. For me, though, I just put it in a Google Sheet, and it takes about five minutes a month.

Dubai schoolteacher Zach Holz (@HappiestTeach) documents his journey towards financial independence on his personal finance blog The Happiest Teacher

Updated: January 9, 2020 02:29 PM

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