Alan Donegan: PopUp Business School Co-Founder, Entrepreneur, Financially Independent Pizza Lover, Marvel Movie fan and soon to be Script Writer
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How do you calculate your net-worth? The first step to change is to take a good look at where you are right now. If you don't know your starting point it is difficult to know if the change you are creating is moving you in the right direction or not. If you can't clearly give a £ or $ figure for your net-worth then this article will help you figure it out.
What is your net-worth?
The common definition is the value of your assets minus your liabilities. But, even the definition has technical terms in it!
Katie and I calculate our net-worth by totalling up all of our assets (property, stocks and shares & cash in the bank) in a spreadsheet and then listing all of our liabilities (mortgages, debt etc.) and calculating the difference. This then gives us a £££ amount that tells us the cash we would have in our pockets if we sold everything right now.
We do this every single month at our monthly finance meeting (normally with a tasty breakfast out) and then discuss the results. We get very excited to see if it is moving in the right direction or not! Is it weird that the monthly finance meeting is one of the highlights of our month!??!
Why bother calculating your net-worth?
Have you heard the expression what gets measured gets improved?
A close analogy to personal finances is body weight. In your twenties you are fit and healthy and moving lots. Then you get a desk job and move a little less and still keep eating. You put on a few extra pounds each year which you don't really notice. Eventually; at about 40 years old you look down at your body and think "where did that come from!!??"
If you were measuring your weight once a month and noticing if it was trending up or down you could do something about it and take control. But the lack of measurement means you don't notice the small movements day to day, week to week or month to month or the upwards trend. If you aren't measuring how can you know if you are making progress or not?
Do you know if you are making progress on your personal finances? Do you know if you are better off this year than last? Do you know if in the last decade you have improved your situation or not? I am sure a lot of you have a feeling that you have but can you categorically say so?
If you aren't measuring your net-worth and checking to see if it has moved in the right direction or not you are leaving one of the most important areas of life up to chance. You are drifting down the river of life with no idea if you are heading towards financial destruction over a waterfall or a wonderful retirement of wealth!
Katie and I took control of our net-worth around about a decade ago and have been tracking it consistently for the last 5 years. It is AMAZING the difference this focus has made to our lives. It creates positive discussions every month about how we can work together to create the financial future we both want.
Just the act of working out your net-worth and tracking it monthly can change your financial destiny. It is one of the most important first steps in Taking Control of your Finances
What goes into your spreadsheet?
This is the bit where it gets a bit more confusing as there are lots of different thoughts on what should be included in your net-worth and what shouldn't. I am going to tell you what Katie and I do and why we do it and I am going to let you make up your own mind as to what you want to include.
What we don't include
To make this easier for you to pull together Katie has created a spreadsheet for you to download and use below.
Including your home?
Is your home an asset?
In British culture the home you live in is meant to be one of your biggest assets. You buy as big a property as you can, get a huge mortgage which you pay down over the next 25 years and then you are left with equity in the home at the end.
The problem is that you have to sell the home or re-mortgage to get to any of that equity! You can't really live off it, you live in it!
The definition of an asset for Katie and I is something that puts money in your pocket. Does the home you live in give you money each month? No! The opposite. It strips money out of your pocket through the mortgage, utilities and repairs. They can be hugely expensive things!
Our definition of an liability is something that takes money out of your pocket each month and the home you live in falls better under this category!
Now you can turn the home you live in into an asset by kicking out your kids and renting out their room to paying tenants (which my Mum threatened to do for years!). This means the home you live in now gives you money each month. There is a cost to this though as you have to share your home.
Recently Katie and I have turned our home into an asset by renting it out. We went travelling round the world and rented it out and this has created an extra cashflow for us. We do spend a lot more on renting Airbnb's though!
Katie and I decided to have two figures in our net-worth spreadsheet. The first is our net-worth excluding our home and the second is our net-worth including our home.
The reason we do this is that when you are calculating how much it takes to retire you want to use the number without the home you live in.
In reality the home you live in can be worth a huge amount of money and you could sell it and get that cash out, but then you wouldn't have anywhere to live!
It is an important distinction to make in working out retirement dates and planning your financial future that we need to include here.
My wonderful wife Katie has been hard at work creating a template spreadsheet for you to use. She is the biggest Excel and Spreadsheet geek in the world and I love her for it!
Disclaimer: we have built this spreadsheet to give you a starting point. You need to go through it, update it, change it for your personal situation and make sure all the formulas tot up correctly. Neither Katie or I are trained finance professionals. We have created this for you to use and make no guarantees and do not update this regularly.
That being said here is the spreadsheet. We would LOVE it if you downloaded it and had a go at calculating your net-worth and then tracking it over time! The first step to change is knowing where you are currently.
What do you do next?
Download the template above and starting adding in your numbers each month! What get's measured get's improved so let's start measuring.
Katie and I will be writing more over the coming months about how we run our monthly financial meetings, track spending and net-worth and plan out out financial future.
We want to you to be able to take control of your financial destiny and create a bright future for yourself and your family.
The first step is to calculate and track your net-worth each month.
Get to work!
Love Alan and Katie
PS we hope you have as much fun as we do working this stuff out
PPS we are always looking to improve. Please let us know in the comments if you use the spreadsheet and if it was valuable for you!