If you’re on the path to financial independence, or if you’re simply interested in the world of personal finance, net worth is a term you’ll hear often.
What is your net worth?
Your net worth is a way of measuring “how rich you are”, in purely economic terms, of course.
It is calculated as “assets – liabilities”. That is, “what you have – what you owe”.
What you have includes all kinds of assets: cash, funds, stocks, real estate … investments of all kinds. If you have your own home or other real estate assets it is important to remember to update your valuation every year. In our case we do not have a house and we do not consider the car an investment but an expense, so we do not include it in our assets. We use the following formula:
MONEY IN ACCOUNTS + MONEY IN FUNDS + OTHER INVESTMENTS – LOANS
The FI number
Your net worth is a very important number for the FI community. As Mr Lyn explained to us, you achieve financial independence when your net worth equals your FI number.
For many, doing this simple calculation is eye-opening. I’ve heard similar experiences several times on podcasts and interviews with people who are on the FI path.
People with great salaries, a great house, a great car … They think “I have such an awesome life”. But when you sit down and calculate your net worth … many times you realize that you are not doing as well as you thought. It may even be negative!
One of the reasons is that it is easier than ever to buy on credit. And truth be told I do not like that. Not only because you pay interest when you can avoid it. But because it seems that you have many more things than you actually have.
Until a few years ago you would get a mortgage for your house. That was “the loan” of your life. Then people started buying cars in installments, and now laptops and even TVs. It even begins to be common to request a loan for vacation trips. My bank, for example, every time I make a purchase over € 150 offers me to split it in affordable monthly payments.
I am quite radical with all this and I try to avoid loans as much as I can. Except for the house and some other investments of that caliber, I think I should be able to save and pay in cash. I don’tt like to have loans. I’m not comfortable with it.
I recommend you to quickly calculate your net worth. Whether or not you are on the path to financial independence it is a very useful calculation.
Mr Lyn and I started to track our net worth in the summer of 2017.
We had just finished our master degree. After two years out of the workplace and with two loans we had negative net worth. We had money in the bank, but we owed more than we had.
The big jump occurs in January of this year, when Mr Lyn starts working. Our ability to save with two salaries instead of one is more than double. So our wealth increases consistently.
Target: net worth vs investments
This year our target is measured by gross investments: “how much money we want to put into investments funds”.
What I like about that perspective is that I feel in control. I don’t depend on market changes to achieve my goal. In our case, most of our assets are invested in the stock market through investment funds. Which means that our net worth goes up and down with the stock market.
The downside is that if you accumulate cash for something or pay back a loan it does not count towards our goal. Although it clearly improve our net worth position.
Possibly in the next few years we will have net worth objectives, because we are beginning to learn other investment tools and we believe that it is better to have a more complete vision. But for this first year we started with what was easier for us: savings.
And you, how do you set your goals?