What are you worth?
I grew up with a guy who bought a top-of-the-line SUV and powerboat in the first year of his first job.
Well, he didn’t exactly buy them. He financed them.
Every Saturday night he would hitch the boat to the SUV and drive up and down the main drag to show everyone just how successful he was.
We probably all know that guy – has the best job, eats in the best restaurants, drives the best cars, gets the latest gadgets – and rubs them in our faces.
In truth, it’s probably nothing. Sometimes it’s less than nothing.
Statistics show most of us owe more than we make and many of us - especially those with high incomes and a lot of stuff - owe more than we own.
Measuring net worth
In personal finance terms, that’s called negative net worth. Net worth is measured by adding up the value of what we own and subtracting everything we owe: Assets minus liabilities.
To get a good idea of your net worth take inventory of everything you own that holds its value or appreciates. That includes cash savings, the market value of investments, pension assets, the appraised value of a house or other properties, equity in a business or anything of value that can be independently appraised.
The definition of assets can be arbitrary. Statistics Canada would include that guy’s SUV and boat but they often depreciate faster than they are paid off. Unless it’s a vintage automobile, it might be best to leave vehicles out of the mix.
Liabilities are basically debt – things like mortgages, lines of credit, student and vehicle loans and balances on credit cards.
Building your net worth
If you’re young, the results could be discouraging. According to Statistics Canada per capita net worth is just under $200,000 but most of that is equity in a house build up over many years.
It’s not surprising young people tend to have a negative net worth after paying for an education and making their way in the world.
The important thing is to set a plan in motion to turn that negative into a positive and build net worth over the long term.
There are two engines to build net worth: eliminating debt and adding to savings.
Each dollar applied against debt is a dollar that appreciates risk free by as much as the compounded rate of interest you would have been charged.
At the same time each dollar saved adds directly to your net worth and has the potential to grow.
If it is invested in a registered retirement savings plan (RRSP), the tax refund can also be applied against debt, further adding to your net worth.
Set up benchmarks
The key is to get those two engines working simultaneously and build momentum over the long term.
Try to consolidate your debt under one loan, a line of credit or even a mortgage. Use an online debt calculator to figure out where your debt will be at specific points in the future.
Interest rates are on the rise so be sure to input a rate a couple percentage points higher than the current rate.
In the interest of accuracy, be realistic. Financial planning is not an exact science, especially when it comes to estimating income from savings. Set goals for savings contributions and estimated returns. If you invest, talk to a financial advisor about return goals, and chose the lower end of the range.
Once you determine your savings and return goals list them side by side with your debt reduction goals.
Set up benchmarks over different periods of time like one or five years. Using the same basic formula – assets minus liabilities – list your net worth goals.
Hitting those goals will take time and discipline, but each time you see that guy drive by with his boat hold your head high - you have a worth and your stock is on the rise.