How Much Are You Worth

Moving ahead financially means that your net wealth (that is, the value of your assets less the value of money borrowed) should increase from one year to the next. Do you know how much you are worth? Do you know if you are moving ahead or going backwards? Make a list of all your assets and the price that you could sell them for today.

Assets include: your house, any investments including cash deposits, shares, rental properties, business interests, superannuation funds and the surrender value of insurance policies. You can also include personal assets that have a value such as cars, boats, caravans, art, antiques etc. Then make a list of all borrowings such as mortgages, personal loans, and credit card debt.

Now add up the value of all your assets and subtract the total value of all your debt. This is your net wealth and represents the amount of value you have created during your working life.

It is entirely possible that your net wealth could be dropping from one year to the next. This happens when you are spending more than your income and you are cashing in some of your investments or borrowing to make up the difference. However, it is not always ‘bad’ to borrow. It depends what you are borrowing for. Net wealth is the difference between total assets and total debt; so, if you borrow to purchase assets then your total debt will increase but so will your total assets. For example, borrowing $10,000 to buy shares which increase in value to $15,000 over time will increase your net wealth. Of course, there is an element of risk in this approach as it is not possible to predict the future value of shares with accuracy!

On the other hand, borrowing to purchase items that have no lasting value will reduce your net wealth. For example, borrowing to take an overseas trip reduces the value of your net wealth by the amount borrowed. The post Christmas period is one where many people find their net wealth has reduced through increased credit card debt.

Increasing your net wealth is simply a matter of using your money wisely. First, you need to be clear about the difference between spending and investing. Spending is using money to purchase items which have no lasting or resale value and which do not produce a return, for example, food, gifts, overseas travel, and general living expenses. Investing is using money to purchase items or investments which increase in value over time, have a resale value and produce a return, for example, investment property, shares, debentures, antiques, etc. To increase net wealth, spending should be kept to a minimum and investing should be maximised. A word of caution here: while cars, boats, caravans, etc., are assets, they are not investments as their resale value drops over time and they cost money to run and maintain. Spending too much on these items will lower your net wealth.

Reducing debt as fast as possible is a very effective way of increasing your net wealth. Start with the debts that have the highest interest rate and increase your repayments to the highest affordable level. Borrowing in order to invest can help to increase your net wealth more quickly if you expect the investment to grow in value and if the cost of borrowing can be offset by the return on the investment.

It is a good idea to measure your net wealth from time to time so that you can monitor your progress and ensure that you are moving ahead and not going backwards.

By Liz Koh
Financial adviser, Money Max. www.moneymax.co.nz.

Liz’s disclosure statement can be obtained free of charge by calling 0800 273 847.