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Why knowing your net worth is important

Net worth is simply defined as the total value of everything you own (cash, house, cars, and investments) minus your liabilities (debts). Liabilities are what you owe and Assets on the other hand is the stuff that you own. When your end goal is building wealth, knowing your net worth is one of the best ways to see where you stand financially, what needs to be fixed and how far you still have to go.

Net Worth = Total Assets – Total Liabilities

Your assets include:

  • Residential property
  • Household content (furniture, jewellery, art etc)
  • Vehicles
  • Boats
  • Planes
  • Cash on hand
  • Investment assets (equities)
  • Retirement funds (pension, retirement annuities)

Your liabilities include:

  • Mortgages
  • Vehicle finance
  • Other debt: Bank overdraft, Credit cards, Store cards, personal loans, student loans, bills outstanding (medical, rent, cell phone)
  • Other loans

Misconceptions about net worth

  1. Having a high income does not imply you have a high net worth. Your net worth is not your income.
  2. Your net worth isn’t just about the assets or stuff that you have. You can own assets worth millions of Rands but if you have liabilities running into millions of Rands you are not a millionaire. It is critical to pay down your debt to be able to build your net worth. The steps you take after calculating your net worth are just as important.

How to calculate your net worth

Step 1: Add up your assets

Consider the following example: Sam has the following: Home valued at R1 000 000, Pension fund with R100 000, Car valued at R450 000, savings account balance of R50 000, Cheque account balance of R2 000.

Total assets = R1 602 000

Step 2: Add up your liabilities

Credit card debt of R150 000, Personal loan debt of R50 000, Mortgage balance of R600 000, Car loan of R250 000

Total liabilities = R1 050 000

Step 3: Subtract total assets from your total liabilities to get your net worth

Net Worth = Total Assets – Total Liabilities

R1 602 000 - R1 050 000= R552 000

Sam 's net worth is valued at R552 000.

 

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