Part 1: NET WORTH - Financial Independence Series
28 Jan, 2024
Welcome to the first post in a short six-part blog series.
Finally, I’m crafting a collection of blog posts to cover critical areas that will set you on the right path with your pūtea.
Each day, I answer emails that all touch on one of the following aspects of money:
How do you work out your net worth? And why even bother?
The purpose and usefulness of budgeting.
Why an emergency fund is a good idea. How do you get one?
Questions about KiwiSaver
How to get out of debt. Why should you bother?
Investing. What are my options?
I’m repeatedly answering similar questions but tailoring them to the person asking. Someone might ask me a question about investing, but it would be wrong not to weave in other aspects. For example, I can’t talk only about investing if the person has consumer debt.
If you want to manage your money well, you must be across multiple areas simultaneously, staring at Point 1 and moving through to Point 6. It’s all connected; no part of your pūtea works in isolation. If someone wants to get out of debt, they can’t make a clean start if they don’t, for example, know their net worth or where their money is going to or coming from, i.e. budgeting.
I hear from a wide range of people, but the common thread is that they each seemed to have missed some financial basics along the way; I’m hoping to help with that. A millionaire reading this might think there is nothing in it for them, but I disagree. I’ve met people far wealthier than I who are shackled to their jobs because even, despite their wealth, they are entirely reliant on a paycheque. And if you are reading this and you owe money, then all I see for you is progress to a solid financial footing. Why am I so optimistic? Because I’ve watched countless people move from debt to having enough money to be content.
To be perfectly blunt, many people simply get sloppy with their money, tacking a new financial decision onto an old one. For example, they take out $50,000 in student loans, get a job and immediately want to buy a house: debt + debt = greater debt. Then they ‘discover’ investing and want to try that too. There is no clarity around their finances or financial vision for their future as they stagger from one idea to the next.
I want to help people create a far better financial foundation to build upon.
If you can get the basics right, you can tailor them to your unique financial situation. You might own a business, own a rental property, be a stay-at-home parent, be paying off debt, or you might be retired. If you cover the basics well, you can then add your own spin. The ultimate goal of this short series of blog posts is to help you feel in control of your money.
I’ll release a new blog post every fortnight until the whole series is out.
Part 1: NET WORTH
How much wealth do you have right now? If you added it all up and subtracted what you owe, what are you worth? Does your figure start with a negative or a positive?
This can be daunting if you’ve never thought about it.
“Ruth, when I contacted you, I felt quite overwhelmed by the task ahead, not overly optimistic, but inspired to at least give it a go”. Lisa.
Lisa started by working out her net worth and, therefore, her financial position as it stood at that time. It was a confronting exercise.
It’s a line in the sand with which to compare your future self. Otherwise, you have no clue if you are becoming richer or poorer.
You can see how you have progressed or regressed in six months, 12 months or five years by referring back to that original figure. We need to grow wealthier over time because doing so will give us choices and options about our lives.
The objective is not to objectify wealth; it’s to create a level of wealth that makes you feel comfortable and in control of your present and future. That number will be different for everyone.
Here is how you work out Net Worth.
What assets do you own? An asset is something that puts money in your pocket.
For example, KiwiSaver, house, investments, money in the bank, etc.
What debts do you owe? Debt is something that takes money out of your pocket.
For example, Student loans, car loans, credit cards, mortgages, overdrafts, etc.
Assets - Debts = Net Worth
Example of a simple spreadsheet to calculate net worth.
#TIP: Only do simple math. You are the CEO of your whanau and whare, and no one is checking up on your numbers except you. Don’t overcomplicate this.
Working out your net worth can be confronting and revealing to those who have never thought about it, but please don’t fear doing the math. Instead of assuming you were doing poorly, did you ever stop to think that you might be doing better financially than you realised? It’s time to check-in.
I calculate our net worth on the first day of every new month. It takes me ten minutes, MAX. I log into each account and note down the balance of it on that day. Avoid thinking, “Oh, but I get paid tomorrow, so I’ll wait till then so my account balance gets bigger”. Nope, 1st of each month is when you sit down to add up your net worth!
The first time you do, it will take a little longer because, for the first time, you have to track everything down, remember every login and password and gain access. It will get faster the more you do it. So, go and find all your money!
Create a list of every Bank Account, Retirement Account, Investment Account, Crypto Account, Credit Card, Store Card, BNPL, Car Loan, Student Loan, Personal Loan, etc.
Think HARD. Are there any that you have missed? Did Great Aunt Sheila once buy you shares in a company you’d forgotten about until now? Find them, and write down their value. Did you once change banks but still have accounts with your old bank? Go and find them. Did you have an account with an ex and wonder what happened to it? Go and find it. Do you own a house? Look up the value of it and write it down.
#TIP: Is your house even an asset, given that it doesn’t put money in your pocket? I think it is mainly due to the huge amount of money tied up in them and the fact that if you sold it, you would get cash. You get to decide. The same goes for your car. It is an asset, BUT one that drops in value each month. You get to decide whether to include it or not.
This exercise is short, sharp and judgement-free.
You are just writing down the facts and quickly working out how much you have versus how much you owe.
Add up both lists and do the math: Assets - Debts = Net Worth
And now you know! Great work!
Go for a walk and dwell on that number. Are you pleased, surprised, saddened or angry that at the age of X, you are worth $XXX?
The beauty of life is that you get to decide what you want to do about your own unique number.
On the first day of EVERY SINGLE MONTH, take 10 minutes to sit down and update your net worth. You’ve already created a list of your assets and debts; now, you are updating the new month's number.
As the months pass, a picture of your financial performance appears. Is your net worth increasing or decreasing over time?
A few years passed by, and Lisa was now able to compare the new Lisa with the old Lisa:
“My belief that I would only ever be able to just get by has been obliterated. Not only am I doing better than just getting by, I’m now actually starting to believe I may be able to semi-retire earlier than the age of 65”. Lisa
In the beginning, don’t overthink it; don’t overcomplicate it. Use a pen and paper, or create a spreadsheet of your own. Simplicity is your friend right now. Capture YOUR information in a way that speaks only to YOU. In time, you might use an online net worth tracker, but it is not the secret to your success. You updating it is.
As the months roll on, you can and will start to add more layers if you choose to, but just stick to the basics of noting down the balance of each asset and debt on the first day of each new month. Look at your numbers. Look at your overall net worth. Observe what happens to them if you now change how you earn and spend. More on that in the next blog post.
The primary goal is to pay off all your debts and only have assets.
