Is your family wealthy? Or do you, like many others, fall for the lazy way of thinking about what being wealthy or rich actually means?
The way a lot of people view wealth is material and monetary accumulation. Or, the one who has most stuff (and money) when they die, wins. Owning stuff does not mean you’re wealthy and it might actually mean the opposite. It all depends on how you paid for the things.
I grew up learning the basic duality of wealth, which meant rich = good, poor = bad.
Why would we need to complicate it more than that? Well, because it’s so dang fun! So let’s jump in, feet first and let’s talk about the term net worth. Are you confused by it?
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The Concept of Net Worth
The financial world is full of weird words and ideas that you most likely won’t encounter anywhere else. Unless you have very geeky friends, like me. One such idea or such concept is net worth.
To be able to look at the topic of riches for any family or individual we need to learn what net worth means. The simple explanation is that net worth is everything you own minus everything you owe. Simple enough, right?
If it is that simple, can’t I stop writing here then?
Well, sure. But I figure I’ll explain a bit more and you read on if you feel like the explanation above seems too simple, fair?
What Do You Own?
It’s easy to trick yourself into thinking that you own a lot of stuff. It could be a house, a car, the furniture in the house, the clothes on your back, and so on.
Some of the things mentioned you probably do own. But to get a bit deeper into what net worth is, we need to add a few more of those financial terms.
Assets and Liabilities
We need to talk about assets and liabilities, which are the key elements in the calculation of net worth. Ok, I can see the fear in your eyes – “He said calculations!”.
Yes, I’m sorry, but this will need some math. But I assure you, it’s very basic and I will hold your hand all the way.
An asset is something you own that you can sell for money so that you instead get cold, hard cash.
A liability is the opposite of an asset. It’s something you owe. A debt of some kind, in other words.
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So let’s go back to the things you might own, and let’s make a silly example. See that cool leather jacket you bought the other day. You own that, right? Or, wait, you paid for that with a credit card, with money you technically didn’t have.
In this silly example, the liability (what you owe the credit card company) is the entire value of the jacket. That makes this jacket a liability and not an asset. So, in a way, you don’t actually own it until you pay the bill to the credit card company.
How Does This Relate to Personal Net Worth?
A more commonly used example to explain this could be with a home that has a mortgage on it. Let’s assume you bought a condo for $100,000. You made a down payment of $25,000 and you got a mortgage for the remaining $75,000. What you actually own in your home here would be $100,000 – $75,000 = $25,000. Until you start paying off the mortgage, you only own the initial down payment you made on the condo.
If this would be the only thing you own in life, your net worth would be $25,000 – $75,000 = -$50,000.
Ouch, not good, right?
Now, let’s step into our time machine and swosh forward 15 years. In this time, you’ve kept paying the mortgage on the condo and it’s down to $10 000. The value of the property also increased by 25%, so it’s worth $125 000 today.
Kaapow! One time travel later and your net worth with this condo alone would be $125,000 – $10,000 = $115,000.
Of course, most real people don’t travel in time and end up being one-asset-wonders. A real person might have a car with a car loan and a mortgage. You might have some money in index funds, and an emergency fund in a good old savings account. Most people have some assets and some liabilities.
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Your personal net worth is the best way to actually know if you’re rich. Or rather, it’s the best way to know your actual wealth. A negative net worth is as I said earlier, ouch, as in bad. It means you owe more than you own.
Do you remember the line from the movie Fight Club?
“The things you own, end up owning you.”
If you have negative net worth, I guess that’s true. Or, wait, no it’s not. The minimalist in me loves that line, though, I suppose.
Related to net worth, the line would be The things you own, are actually owned by someone else. So, never mind.
Even if your net worth is negative, it’s good to know. Net worth is one of the best ways to track how your wealth develops and improving your net worth is how to grow your wealth.
In our family, we track our personal net worth with a simple spreadsheet that we update every now and then. A few years ago we fell for the myth that owning a house is one of the best investments you can make.
Especially not if you have to fix the house.
Looking back, we should have invested money in the stock market and held off on buying a house. It would have been better for our net worth as well. Especially if you add compound interest. But that’s a story for another day, my friend.
I have to admit, there are no grand numbers in our spreadsheet. We’re still fixing our house without taking out a second mortgage. So less money added to our net worth. But the numbers in the sheet are positive and increasing, little by little.
Net worth can help you track your path to becoming wealthy and financially independent. Which is also nice to have a visual overview of. We’re on that path. And have a special spreadsheet for that.
How about you, do you track your net worth? Do you also use a lovely spreadsheet? I love spreadsheets. <3
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