Why Knowing Your Net Worth is So Important
I'm a bit of a number geek. Graphs and spreadsheets about my finances are fun for me. I parse data and draw conclusions to pass the time. I'm suuuper 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? (67%, but who's counting?) You, probably, won't want to delve as deeply into the minutia of your finances. And that's OK. We'll have less to talk about at the club when you see me poppin' bottles (Oh wait, that's not me, it's an impostor! Watch out!), but it's hard to yell over the music anyway. If you only keep track of one number in your finances, let it be Net Worth. Net Worth, sadly, has nothing to do with nets. Sorry to disappoint the fishers out there. It's simply how much you're worth, in a financial sense. It's certainly not the whole picture of your worth as a human being. It doesn't care how much joy you bring with your awesome back massages, or how much you make people smile with your homemade cookies. I do, I promise. The number, however, is cold, hard, and cares naught for the squishier elements of life. To put it simply, Net Worth is your assets minus your liabilities. Depending on who you talk to, this can be a simple or complicated number to figure out. I have a way that's pretty simple, but first we have to understand what an asset and liability are. An asset is simply 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, although an expensive one. Your clothes are not assets. Your car you drive to work in is not an asset. I don't even think the house you live in is an asset (although that's a longer conversation, and plenty of people disagree with me). Your self-esteem isn't an asset. Liabilities are things that cost you money. Money you owe other people are liabilities, like credit card debt, student loan debt, car loans, and maybe even the mortgage on your 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 100,000 AED invested in Index Funds, 50,000 AED in cash in the bank, and a paid-off rental property worth 200,000 AED. Total assets: 350,000 AED. In the liability column, let's say you owe 40,000 in credit card debt, and you have a student loan of 60,000 AED. Total liabilities: 100,000 AED. Your Net Worth would be 350,000 AED - 100,000 AED = 250,000 AED. Now you know how to calculate it in a simple but useful way. Why would you want to do this math? Math is hard! Here are a few reasons why it's important to know your Net Worth. 1. It's how you calculate when you can retire. When your Net Worth is 25x your yearly expenses, you are technically Financially Independent. You can 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.
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 be changed so you don't go bankrupt.
It can help you see if your money is invested how you want. 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.
It makes you be honest with yourself and it may spur more inquiry into what is going well and poorly for you. It's sort of like a yearly (or quarterly) checkup at the doctor. For me, as a finance geek, I calculate mine every month when I get paid. Then I do a bit more of a deep dive every 3 months. After all, if you don't track it, you can't fix it. There are even apps that do this automatically, although these are a bit harder for expats. 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 5 minutes a month. It's a great return on my investment, and one I think you should take the time to investigate as well. If you liked this post, come join the discussion over at The Happiest Teacher Facebook Group! I would love to have your voice added to the discussion! Also, if you're into that Twitter life, come follow me!