Don’t shy away from the networthometer

Nima Abu Wardeh: Measure your net worth to find out how your finances are progressing. Are you in the green, the black or the red?

Illustration by Gary Clement for The National

It's always good to have something to measure progress against, don't you think?
When it comes to financial well-being, net worth is often used to keep track of how we are doing in our quest for financial freedom.
So, what is net worth?
For a company, it is assets minus liabilities.
The same applies to each of us. Our net worth is the cumulative total of our assets minus our liabilities.
But it is not that simple. People include different things in their lists, and this stands to reason because we all have different goals and we are in different phases of life.
So what can you count as part of your net worth?
Well, I would say:
• Assets – cash, real estate, bonds, stocks and shares, and other investments.
• Liabilities – mortgages and all loans.
I would not include personal possessions or a car in the asset list, as the value is subjective and ever decreasing. But I would definitely include a car loan as a liability because it needs to be repaid.
Including the family home in the asset list is debatable. Why? Because it is only worth what someone will pay you for it at the time you look to sell. Plus, if you do sell, you need to find somewhere else to live.
Even if you are lucky enough to have a nice chunk of equity in your home, you should take into account utilities, maintenance, repairs, insurance, and in other parts of the world tax. In other words, the money that you would be paying out wherever you live. Where is it going to come from?
See, every time we dig into an area of life we discover that nothing is simple, that we need to sit, think and work things out. How about you do this with eyes wide open and a positive attitude of "super, I'm taking control of my life", rather than put it off or bury your head in the sand.
Why am I saying this? Because I find that people would rather not spend the effort sorting things out, and end up paying a massive price at some point as a result.
Back to net worth. I suggest having more than one list. Here are a couple:
• Overall net worth – total assets minus total liabilities. This is for general tracking and to show you the direction that your numbers are headed in.
• Estate net worth: this is all your liquid assets minus your liabilities. Add to this any cash payment that a life policy would pay out, minus any costs associated with your passing away. I am not being morbid, but I am asking you to think of what your family would live on should you die suddenly.
As you near the time you want to – or have to – stop working, your concern will include how your net worth can fund your continuing cost of living.
When you calculate your net worth, you basically get a feel for how much money would be in your life if you were to sell all your assets and pay off your debt, and what you need that money to cover in the way of your outgoings.
Of course we want the needle to be firmly in green territory on the networthometer, but do not despair if you are in the red. Use this metric to see how you are progressing – how your decisions are taking you closer to the end of the red-zone and into the "I have more assets than liabilities" range.
It is scary knowing our reality, isn't it? With knowledge comes action. Even doing nothing is doing something – you are choosing to not act on what you know. Does that make sense?
So instead of avoiding where your life is on the networthometer, find out. Mark your position and start looking at ways of shifting that needle to where you want it to be.
Investments are a key component of net worth, but there are not many options for most folk without a big stash of cash.
So next week I am going to write about the ordinary man or woman getting on the investment ladder. We need investment tools and vehicles that give us a chance to participate, enable us to get out of the debt cycle and empower us to build our financial base, constantly nudging our needle that little bit closer towards financial freedom each year.
Nima Abu Wardeh is the founder of the personal finance website www.cashy.me. You can contact her at [e-mail]
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