People often think of wealthy entrepreneurs or celebrities when they hear the term ‘net worth’, but it’s a financial concept that applies to everyone. You don’t have to be a billionaire business disruptor watching your stock price rise and fall to care about your net worth. Simply put, it’s the difference between the value of all your assets (like your house, cars and other valuable possessions, investments and cash) and the value of all your liabilities (like your home or car loan, credit card debt and personal or student loans).

If you’re managing your money well with sound financial planning, you should have a positive net worth. In other words, you own more than you owe because your total assets are worth more than your total liabilities. Like a report card on how you manage your finances, your net worth shows how healthy your current financial position is.

Why you should know your net worth

Knowing your net worth will help you make the right choices and take the right steps to realise your financial goals. It helps you understand which assets can grow your wealth the fastest, and at what risk. It also helps you identify the liabilities that are slowing down your wealth creation, so that you can develop a strategy to reduce those liabilities. You’ll get an accurate idea of your level of financial security and be able to adjust your financial planning to stay on track towards your objectives.

Your net worth also lets you know how much your dependants would inherit if you were to die. Being conscious of how your net worth affects you and your loved ones can help you make smart financial decisions about buying a house or business, applying for a loan, planning your retirement or taking out life insurance.

Financial services providers check your net worth to see if you are eligible for certain investment products, like hedge funds or more complex investments. If you’re a high-net worth individual, you can rely on a wealth manager or a business adviser to suggest unique investment strategies that will balance risk with optimal growth.

Calculating your net worth: A step-by-step guide

Calculate your net worth on the same date every year, because assets like cars lose value over time and inflation will reduce the actual gains you make on your investments.

Step 1: List the things you own

List both your fixed and moveable assets, including the following:

• The house or land you own, or your share of it.
• Investments including funds, stocks, gold coins, unit trusts and exchange-traded funds (ETFs).
• Savings accounts, including mutual funds, money market funds, retirement plans, provident funds and pension funds.
• Cars and any other vehicles, watercraft or aircraft that you own.
• Collectibles, including valuable art, jewellery or antique furniture.

Step 2: List how much your assets are worth

Your assets should be valued at their market value, which is how much you would get for them today if you sold them. Every year, you should get a tax certificate that shows how much any shares, unit trusts, ETFs, fixed deposits and money market funds that you own are worth. Your retirement fund must also give you a statement that includes the value of the fund every year. Include the value of any stokvel savings or life insurance policies, including credit life insurance, as well.

The value of your home can be based on the municipal valuation used to assess your rates payments. However, if your municipality hasn’t updated property valuations in several years, you can also consult an estate agent to get a better idea of the current market value. To find out the value of vehicles, coins, art, antiques or other collectibles, consult a reputable appraiser in the sector. Note that classic collectible cars do not depreciate constantly like other vehicles – in contrast, their value may increase over time.

Step 3: Work out how much you owe

Include long-term debt like a home loan as well as short-term debt like an overdraft or personal loan. Don’t forget to include any amounts still owed on your vehicles, credit cards and store accounts.

Step 4: Create your balance sheet

Insert all the information about your assets and liabilities on a balance sheet. Update this balance sheet at least once a year, but also whenever you buy a new asset or make a new investment, increase an asset’s value (for example, by renovating your house), sell an asset, or pay off a debt. You’ll then be able to consult your balance sheet for an instant update on your net worth whenever you need it.

Actionable strategies to increase your net worth

If you owe more than you own, you have negative net worth, and you’ll find it difficult to achieve long-term financial stability and grow your wealth. If you have negative net worth or it is decreasing, you’ll need to work on strategies to reduce your liabilities, save more and increase your assets.

Remember that your income does not form part of your net worth. You could enjoy a good salary, but still have a low net worth if you spend more money than you invest in savings or in assets. In contrast, you can build wealth and increase your net worth even on a small income, if you spend your money wisely on assets and investments that increase in value over time.

Consider these 8 tips to increase your net worth:
 

• Create clear financial goals: Set yourself financial goals for the short, medium and long term, like creating an emergency fund, buying a car or a house, saving for your children’s education and your retirement, and paying off debt.
  
  
• Keep track of your spending with a budget: A detailed budget will help you compare the money you spend to the money you earn, so that you can make adjustments to live within your means.
  
  
• Reduce debt: Pay off high-interest debt like credit card balances as soon as you can. A consolidation loan to pay off all your debt with a high interest rate could save you money in the long run, if the interest rate on the consolidation loan is lower than the total interest you were paying before.
  
  
• Save more: Set up a stop order to put money into accounts that earn interest automatically every month. Even an emergency savings account, containing 3 to 6 months’ salary that you can access immediately for an urgent unforeseen expense, can help to build your wealth. Instant accessibility means you won’t be earning as much interest as you would in a less accessible long-term investment account, but an emergency fund can still save you from having to borrow money in a crisis and pay interest on the loan.
  
  
• Invest wisely: Put money into assets that have the potential to grow over time, such as stocks, bonds, real estate and long-term savings accounts. Make sure to choose products and services that will help you diversify your investments and lower your risk.
  
  
• Supplement your income: Get a part-time job, do freelance work, or start a side hustle to make more money.
  
  
• Pay less tax legally: Use tax-free savings and investment accounts to make your retirement and other long-term savings more tax efficient.
  
  
• Spend money smartly: It may seem contradictory, but to save money and improve your net worth, spend more on high-quality goods and credible professional services so that you don’t have to pay twice to replace shoddy work. Spend frugally, but turning into a cheapskate can cost you more money than you save.