You don't need to be a millionaire to worry about your net worth, sometimes it's a great way of measuring progress. Here's why net worth is an important financial yardstick - and how to quickly calculate it.
Clarity in a single number
Net worth is the sum of your assets (your savings, investments, property and pensions), minus your liabilities (your loans, credit cards and mortgages).
It might be useful to think of it as your 'runaway fund': what would you have left if you liquidated everything, emptied your accounts, and settled all your debts right here and now?
Knowing just one number can tell you a lot about how you spend your money. Over time, you'll see how your financial decisions play out as straightforward growth or decline. If you keep track of it, you'll be able to see how far you've come from earlier numbers.
Weighing up your next financial move
On the whole, if a financial move is a good one, then it should increase rather than decrease your net worth. It's a great indicator of how frugal you are. If you're not spending your money on things that have little or no cash value (such as holidays or groceries), you'll be left with more in your accounts which should raise your net worth.
The same goes for paying off debt. As you pay off a credit card, your net worth should gradually increase - although that relies on your payments outweighing any new spending.
Conversely, making moves that decrease your net worth are nearly always a bad idea. That's ignoring spending on basic necessities like food and bills, which may create understandable dips in your net worth.
Seeing your financial decisions in this light might reveal where you are spending on things you just consume, rather than things which bring long-term value. This also applies to consumer debt, such as credit cards and loans.
Playing the long game
Perhaps the greatest benefit of knowing your net worth, being able to look back and see how far you've come is pretty valuable. By making constant comparisons, you'll be evaluating your progress over time and holding yourself to account. You won't be able to tell yourself you're doing well, or hide any mistakes.
If you crunch the numbers correctly to start with, you'll always have an honest benchmark that pins your spending to a point in time.
Even better, you'll feel like you're in competition - with yourself. Instead of worrying about keeping up with friends or colleagues - something which can get you in financial trouble - you'll be setting yourself the goal of beating your net worth from last year.
How to crunch the numbers
Providing you have the information to hand, it's quite simple.
Let's take a 'Joe Bloggs' example:
The average UK adult has £10,200 in savings, a pension pot of £49,988, and property worth £243,520. Note that investments haven't been included as few average figures exist.
They also have an average debt of £30,455 (including any share of a mortgage, plus any credit cards and loans).
That leaves a net worth of £273,253.
These numbers mix statistics from different sources and should be taken with a pinch of salt but you get the idea. Your number might be higher, lower, or even negative, depending on your circumstances. What's important, however, is knowing what your number is - so you can work to improve it.
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