Working out your net worth reinforces financial security
Your Money
susan.edmunds@stuff.co.nz
You know what you earn. You know what you own. But do you know what you are worth? Your net worth is a calculation of your financial situation.
It takes into account the value of everything you own, including savings you have in bank accounts and any other investments, minus any debt you have.
If you have a positive net position, what you own is worth more than what you owe.
If it’s negative, your debts outweigh your assets.
It’s common for younger people to have more debt than assets as they grapple with things such as student loans before they have had the chance to amass any assets.
Data last year indicated that 18 per cent of New Zealanders had net worth of less than US$10,000 ($14,569).
You might think it doesn’t really matter. After all, it’s just numbers on a page.
But knowing your net worth is a key part of understanding your financial position, the type of future you are facing and what you might be able to do to improve it.
David Boyle, general manager of investor education at the Commission for Financial Capability, said most people gave little thought to their net worth, unless they were applying for a mortgage and the bank demanded the information.
But it was helpful to understand, especially for people who were considering taking on more debt, planning a job change or thinking about retirement.
Some people might have wealth they had forgotten about – such as a KiwiSaver account that was steadily increasing in value, he said.
But others would need to understand how their debt level affected their position.
‘‘You might feel wealthy if house prices are going up, but if you actually only really own the garage, your net worth doesn’t look as good,’’ he said.
‘‘They might have money in a bank account but they might not realise how much debt they have built up and how that will detract from it. If you have debt on your credit card, that higher interest rate means your net outcome is only going to get worse, not better.’’
Knowing your net worth would give more insight into what the future might look like, he said. It should enable you to identify the problem areas and focus on them before they get out of hand.
When you reach retirement, you can turn to your net worth assessment again, to consider which assets you want to use to provide an income.
‘‘Think about what’s liquid and what’s illiquid. It’s not just your home and savings but maybe your art collection or something else that you’ve collected that’s worth something.’’
He said it was something that people should check in with every so often. ‘‘It doesn’t have to be annually but a little more frequently than never would be a good start.’’
Michael Cave, managing director of Cave Financial, said knowing your net worth would create more clarity and confidence with which to approach financial decisions.
Operating without that information could be dangerous and stressful, he said. ‘‘It can even create tensions in a relationship.’’
Some people would find they were in a stronger position than they expected and had been worrying unnecessarily and being too conservative with their money, he said.
‘‘They can’t make sound strong financial decisions being overcautious or overly conservative or procrastinating and not taking action to either pursue positive opportunities or reduce some of the financial troubles they are in and getting into a stronger financial position.’’
But others who had not considered their net worth recently would find they had been overconfident and made spending decisions too hastily.
‘‘The ability to easily obtain debt is giving individuals, families, companies and even countries an over-confident position, so when there is a shock it can leave people in a vulnerable and difficult position,’’ he said.
‘‘The benefit of understanding your net worth is that you can dig deeper and review what assets are liquid or not to see what funds you can access in an emergency or in the short term such as to pay for some unexpected medical costs or fund an emergency overseas trip.’’
Reviewing what assets were appreciating or depreciating in value would help with planning for the future, he said.