In this social media age it is easy to get caught up in what everyone is doing and form a false idea of yourself in order to belong and have a sense of keeping up with the "Jones". However, a false sense of who you are and what you have is the first step down the slippery slope of financial doom. In order to make strategic money moves that put you on the path to sustainable financial stability and freedom it is critical to know your financial net worth. Before jumping into how to estimate your financial worth, a key point to note is that honesty is the hallmark of effective financial planning. You need to tell yourself the truth about who you are and what you have. This would help you come up with a money plan that works for you. Putting it simply you need to cut your coat according to the cloth you actually have not the cloth you wish you had or the coat the people on your social media feed have.
Determining your financial net worth (which is the same as your wealth) is very easy. It is simply the difference between what you own (assets) and what you owe (liabilities).
Assets - Liabilities = Net worth
Assets can be categorized into two:
Wealth generating assets: Assets which appreciate in value or provide some sort of income or return e.g bank accounts, stocks, bonds, real estate, pension accounts; and
Ordinary assets: Assets which do not typically generate income and appreciate in value e.g. cars, electronic devices and furniture.
For the purpose of assessing your net worth what is important are your wealth generating assets. However, cars can be included in your assets for net worth calculations as they often have considerable resale value. Liabilities on the other hand are very straight forward. It basically refers to what you owe eg. car payments, loans and other debts.
To further demystify concept of net worth and how it affects the money moves you make let’s look at the net worth calculations of Tola and Chike in the picture above.
On the basis of their income, Tola and Chike appear the same and one would assume that the same money plan would work both of them. However, by assessing their net worth, it’s clear that although Tola and Chike earn the same amount, Tola is wealthier than Chike. Any money move that does not take into consideration Chike’s debt and it’s impact on his wealth would be at best sub-optimal and at worst set him on an exercise in futility. This is why knowing your new worth is the starting point of any journey to financial independence. It shows you exactly where you are, what your financial strengths and challenges are and puts you in a better position to make money moves which are best for you.
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