What is net worth and how do I calculate my net worth?
What is net worth and how to calculate my net worth?
*This article was first published in July 2020 and last updated on 22/02/2022.
If I ask you to picture what a millionaire looks like, what comes into your head? Is it someone with a big house, expensive cars and frequently takes exotic holidays; what is a millionaire anyway? Good question. To understand what a millionaire is, we first need to understand the concept of Net Worth. It’s very simple and is like a balance sheet for individuals.
Net worth is everything you own, less everything you owe.
Let’s break that down, so grab a pen and paper.
Everything you own.
This means everything in the world that has your name on the owner’s document, deeds or account. Your house is a good place to start. Use the Zoopla valuation tool and see what your house is worth. Write this figure down at the top of your list. If you rent or live with family, you will have to skip this one.
Next up, your cars, but only if they are either owned outright (you paid cash for it) or it is on some kind of payment scheme with a route towards ownership such as a bank loan or Personal Contract Purchase (PCP). Don’t include it if you have a fixed term lease (Personal Contract Hire). Have a look on Auto Trader to get an idea of what your car is worth and note this down as well.
The next stage is to consider your personal investment portfolio and savings. Use your latest statements and online account access to find out the current valuation of all your pensions, ISAs, bank accounts, investment accounts, premium bonds and the like. Note each one down individually. You might also have some precious metals such as gold, silver or platinum. You can use this tool to find out the current valuation.
With the standard investment vehicles taken care of, have a think about any antiques, art, jewellery, watches or other similar items of significant value that may be worth adding to your list. You could visit an auctioneer to get an up to date valuation. The smaller things you own such as household furniture, clothes, electricals and the like are probably not worth listing unless there are stand-out items like designer handbags or high-end audio systems that have a strong second-hand market.
Finally, think about the value of any businesses you may own, although valuing this type of investment is beyond the scope of this article.
Right, with everything you own now listed, add everything up in the ‘what you own’ column. This is going to be the biggest number today, so enjoy it while you can – it’s probably bigger than you thought it would be.
Everything you owe.
To bring things crashing back down to earth, we need to start thinking about how you are paying for everything on your list. So, start a new column and kick things off with your mortgage. If you wanted to pay off your mortgage today, how much would it cost you? This is known as a redemption statement or final settlement figure. Often your online mortgage account will tell what this is. For example, you bought your house ten years ago for £300,000 with a £250,000 mortgage and you have since paid off £75,000, the outstanding balance would be £175,000. Add this to the new list.
The same goes for your cars. Find out how much you owe on the finance, loan or PCP contract. You may also need to obtain a settlement figure from the provider.
Here’s more bad news. We often owe money for things we enjoyed the benefit of a long time ago, but didn’t necessarily become an asset.
What we’re talking about is personal unsecured debt for things like holidays, clothes, living expenses and things for the home. This means credit cards, personal loans, pay day loans, loans from family members, overdrafts and the like. Go through your paperwork and list all the outstanding balances.
Now it’s time to add up everything in the ‘what you owe’ column. This is the most challenging bit of the exercise.
Are you a millionaire?
One more calculation to do. Take the ‘what you own’ figure and subtract the ‘what you owe’ figure. This is your Net Worth. In other words:
If you sold everything you have and stood on the side of the road, how much would you have left over after paying off your debts?
Would you have anything left at all or would you be left with a negative figure? Whatever it is, this is the true acid-test of your financial health. We have put together an example calculation and format below to help you with estimating your net worth.
How to calculate Net Worth with a Net Worth calculation sheet.
If you’ve done something similar, is it more than you thought it was? Is it less? How does it make you feel? Typically, what you may find is that your house makes up a major proportion of your net worth, particularly if you have been in it for a long time, paid down your mortgage and property prices have risen.
Equally, with good investment growth over time, you may find that your retirement portfolio is worth well into six-figures. Combine this with the equity in your home plus low debts and it doesn’t seem like such an alien concept that your net worth could be over a million.
The most unlikely people can be real millionaires. It could be your neighbour, an elderly relative or anyone that has just been frugal, lived below their means and consistently invested in growth assets over their lifetime.
This was discussed in a previous post about how buying a cup of coffee each day could seriously harm your retirement plans.
Think back to the start of this article when you imagined what a millionaire looks like. By going through this exercise it’s clear that the visual displays of wealth such as big houses, expensive cars and an enviable tan are no guarantee of true wealth. They could be a result of large mortgages, car finance and very little in retirement accounts. The owner’s net worth could be close to zero (or below) and they are simply relying on their high salary to fund their lifestyle. Nevertheless, they could actually be a millionaire. The key takeaway is that it’s impossible to tell from the outside what a person’s net worth actually is.
It is one thing to look like a millionaire and quite another to actually be a millionaire.
What’s next?
If you found this exercise enlightening, surprising or frightening you may wish to take steps to increase your net worth. Just reduce what you owe and increase what you own then revisit this exercise frequently to measure how well your net worth is doing against your target.
If you’ve found a surprise in calculating your net worth, want to increase it or just need some help in calculating it feel free to get in touch and one of our Advisers will walk you through the process.
Remember, this article offers information about financial planning and should not be taken as personal advice.