If you have R1 million in your bank account, does it mean that you’re a millionaire? Nope, it simply means you have R1 million in your bank account! Your bank balance doesn’t indicate how wealthy you are. For that, you need to look at your net worth, which tells you the full story of where you stand financially.
Here’s why you need to know your net worth, and how you can grow it…
What is net worth, anyway?
The word “net” means “after subtracting expense and debt”. That’s exactly what your net worth is: everything you own (your assets), minus everything you owe (your liabilities). Your assets could be money in a savings account, other investments, your house and your car. Your liabilities might include the repayments you’re still making on your house and car, plus other debts like student loans and credit cards.
How to calculate your net worth
As mentioned, your net worth = assets — liabilities.
Here’s a basic example:
There’s no need to whip out your calculator each month to gather the balances of assets and liabilities. Just log in to your 22seven profile to see your net worth. Easy as that! To provide an accurate calculation, it’s important to link all your accounts and add your other assets and liabilities using 22seven’s manual account feature.
Note: your net worth can change because major assets fluctuate in value. For example, your house can appreciate, making your assets grow, and you might have paid off some debt, decreasing your liabilities. Try to keep up to date with how much your assets are worth to make sure your net worth is accurate.
How to grow your net worth
Growing your net worth is a simple concept, but it’s not always easy!
An increasing net worth indicates that your assets are growing faster than your debts. Therefore, reducing your debt is the easiest way to grow your net worth. Pay off your credit card and target other debts with high interest rates.
Don’t get disheartened if you have a low or even negative net worth. Many young people start out with a bunch of student debt, which can be remedied by focusing hard on debt reduction in the first few years of your working life.
Be consistent with your savings and stop spending too much of the money you’re making. Try to live below your means — it’s a real skill that will help you grow your net worth and aid you dramatically on your journey to financial independence. Steer clear of debt that you don’t absolutely need to take on. (Read this article to understand the difference between good and bad debt).
Lastly, make sure your savings go to the right places, depending on your particular financial goals. Regularly invest your money into appreciating assets to benefit from the power of compounding — where your money grows exponentially over time. The longer you’re invested, the greater the effect, so start investing as early as possible.
Ultimately, your net worth is a useful snapshot of your entire financial situation, which is why it’s worth checking every now and then. After all, the more you know, the more you can grow.