Get to grips with your financial situation

BIG STEP FORWARD: Calculating your net worth forces you to face up to your whole financial situation - warts and all.
BIG STEP FORWARD: Calculating your net worth forces you to face up to your whole financial situation - warts and all.

How much are you worth right now?

You can probably have a pretty good crack at guessing how many sweet Sir Edmunds are tucked away in your wallet. You might have more than an inkling about the level of funds left in your bank account.

But could you say - off the top of your head - what your total 'net worth' is?

Net worth is a measure of all the stuff you own, minus all the stuff you owe. 

And calculating it is the most significant thing you can do in regards to financial literacy, according to David Kneebone, executive director of the Commission for Financial Literacy and Retirement Income.

"What I've noticed is quite a distinct behavioural change once it's done for the first time," he says.

It may be a bit of an eye-opener because it forces you to face up to your whole financial situation - warts and all.

The holy grail of personal finance is to improve that net worth over time by building up assets and shrinking debt.

But it's hard to improve if you don't know where you stand to start with. 

Here's a simple three-step guide for calculating your own net worth.

For this exercise you can either plug numbers into the online calculator at Sorted, print out a template like this one or stick to good old-fashioned pen and paper.

1.    The Black Ink

To start with, we're going to round up everything you have of value and add it all together. This makes up the positive side of the net worth ledger.

Check the balance of all your bank accounts and term deposits. Don't worry about counting up the coins in the ashtray, but do include any stashes of banknotes that might be hiding under the mattress.

If you own shares in a company, you can easily check how much they're currently trading for on the NZX website or on the relevant foreign stock exchange if they're listed overseas.

KiwiSaver converts may well be pleasantly surprised at how fast retirement savings stack up behind the scenes. Contact your KiwiSaver provider directly or login to their online services to get the latest balance of your nest egg.

If you own a home, you probably have a fair idea of what your biggest asset is worth. Council valuations for rates purposes can be used as a rough guideline, although they're not always accurate.

If you're willing to fork out $10, you can get a basic property report from Quotable Value which will give you a decent estimate.

At this point, ignore the mortgage.

Add any vehicles to the list, but don't use the price you paid when you drove off the dealer's lot. Cars lose value quite quickly so you have to subtract some money from the original price each year. You can use a depreciation calculator like this one to give a rough estimate, or just scout around on Trade Me to see what similar models are going for.

This is a bit trickier. A business' value is not just based on the assets it owns but future earning potential. Essentially, it comes down to the price someone is prepared to pay for it. Make your best estimate and jot it down.

Personal effects:
Use a threshold of $500 or so to save mucking around trying to value every little thing. Focus on the big stuff - jewellery, expensive furniture, electronics, maybe artworks.

Finally, add everything together and put the total at the bottom of the column. 

2.    The Red Ink

This is the not-so-fun bit. It's time to take all your debts and unpaid bills, and lay them out in front of you in one big sea of red ink.

It's an exercise that Raewyn Fox, chief executive of the Federation of Family Budgeting Services, is very familiar with.

Most of the people coming in to see her network of budget advisers don't have any assets to speak of.

It can be a big shock to the system seeing all the debts together. But for some, it's enough to make the penny drop and spark a change in behaviour.

"Sometimes when people come to that realisation, it's problem solved," says Fox. Other times, they need a lot more support.

Either way, it's a vital first step to getting things under control.

This will be the biggest debt by far for most homeowners, but it's easy to monitor. You should be able to check your outstanding mortgage balance at any time through internet banking or contacting the lender. 

Consumer finance:
Check all your outstanding credit card balances, and if you're in overdraft, write that down too. 

Don't forget the remaining balance on any hire purchase agreements you're paying off, and if you have a vehicle loan or debt consolidation, add it to the list.

Student loan:
Login to the IRD website and you'll be able to see just how much is left to chip away at until the student debt millstone is lifted from your neck. 

Other debt:
Years of overdue library fines? Unpaid traffic infringements? Still owe your mum for that time she posted your bail? Don't forget to include them here too.

Now add the whole lot together into one big red figure. 

3.    Balance the Books

You should have two figures, one at the bottom of each column. Subtract the liabilities from the assets, and you've got your net worth.

Now it's time to see how that number stacks up. 

First off, if it's negative, don't panic. 

"It's not uncommon the first time you do it to be in negative territory," says Kneebone.

Often younger people in particular will be dragged into the red by big student loans. But not all debt is equally bad. Sometimes it can be used as leverage to help you get ahead.

"That's not necessarily a bad thing, especially when that career path leads you to a high income," says Kneebone.

If your net worth is in positive territory, you may be interested to see how it compares to everyone else.

The best numbers we have to work with come from a 2004 Statistics New Zealand report. 

At that time, the median net worth for individuals older than 15 years was $69,800. Adjusting for inflation, that's about $87,500.

Median net worth unsurprisingly increased with age, peaking at $155,800 ($195,500) for people aged 45 to 64.

Beyond satisfying your curiosity, there's not much point comparing your net worth to others.

Some people can get turned off the whole concept by confusing the purely financial measure with actual self-worth.

What matters is that the number - no matter where it might be right now - grows steadily larger over time.

Kneebone calculates his net worth once a year in order to track progress.

"Some people find it incredibly motivating, and do it quite often," he says.

If you save the numbers into a spreadsheet and revise them every few months or once a year, it's easy to update regularly.

If all goes according to plan, you should be rewarded with seeing your net worth track steadily upwards.

It's the best way of making sure that your finances are on the right track.


Have you calculated your net worth? Were you surprised by the result? Leave your comments below.