Three steps to calculating your net worth – and how to improve it

Having clarity over – and control of – your financial situation is all about understanding that situation. But how long has it been since you sat down and calculated your net worth?

Here’s the simple formula to track your financial position – because knowing exactly where you stand today, and what to do about it, is the foundation for building lasting wealth.

We’re constantly worrying about our finances and saving money, but when was the last time you calculated your net worth? Credit: Dominic Lorrimer

Step 1: Your liabilities, or what you owe to others

Take a moment to do a stocktake of everything you owe (but don’t get scared – we’ll shortly get into the different calibre of debt, and how careful prioritising can, in fact, support your life goals).

Your debts could be many and varied. Credit card balances, leases, personal loans, store finance and buy-now-pay-later arrangements all balloon payment obligations. Then consider your current outstanding mortgage, investment loans and any other debts.

Take stock of the lot and add these together to find your total liabilities. This number tells an important story, but it’s only part of your financial picture.

Step 2: Your assets, or what you own

Next, it’s time to look at the positive side of your balance sheet – your assets.

Calculate the total current value of your home, any share portfolio or managed fund investments, investment properties, cash savings, vehicles and other valuable assets.

Guesstimate if you’re not entirely sure of their worth – the exercise is always interesting, and it will still give you a bottom-line ballpark.

Step 3: The net worth formula, and how to interpret your result

Now for the pivotal moment: simply subtract your total liabilities from your total assets. This net position reveals your true financial standing today.

If you find yourself in negative territory (owing more than you own), recognise this as a crucial turning point. This position often stems from using credit for consumption rather than investment, and perhaps financing depreciating assets such as vehicles.

For those in positive territory, well done. Yet, the bigger question remains: are you tracking well enough to support the life you ultimately want?

Credit cards and personal loans are the absolute worst very-bloody-bad debt offenders.

Whatever your result, let’s talk ways to improve it.

Experts often throw around the terms “good debt” and “bad debt”. I prefer to call it “alright debt” and “very bloody bad debt”. Now, alright (or good) debt is debt on which you can claim tax deductions for interest. It’s investment debt.

Very-bloody-bad debt is personal debt where the interest does nothing but drag you backwards because you earn no tax deductions for it.

Credit cards and personal loans are the absolute worst very-bloody-bad debt offenders. It’s twofold: they’re usually at far higher interest rates than mortgages and often tied to things that lose value over time (or experiences that fade in memory long before the debt is cleared).

So unlike a mortgage, which is still a form of very-bloody-bad debt, but one that helps you build wealth through property ownership, these debts are pure wealth destroyers.

In fact, I consider mortgages not-so-bad debt. First, it’s a great forced-savings tool; you’re much more likely to stick to mandatory mortgage payments than to voluntarily save that same amount each month.

And as you pay down the principal, your property will hopefully appreciate. Plus, the faster you pay it off, the less interest you’ll pay. So don’t bemoan your mortgage through that process too much.

What – meanwhile – should you do about “alright” investment debt? This can be a powerful wealth-building tool, and you’ll hear a bunch of finance professionals say that repayments on debt for which you can claim tax deductions should be on an interest-only basis.

This is because keeping your interest high with a loan balance that stays the same maintains your tax deductions.

However, there’s a big flaw in this approach with some negatively geared investments: you could be out-of-pocket every month. Yes, the government chips in (that tax deduction), but only to the extent of your marginal tax rate – you may need to find extra.

Which means you need to make a big fat capital gain at the end when you sell to compensate. Will you?

Now, the only time I’m a believer in interest-only payments is if you still have very-bloody-bad debt, including a home loan. Remember the interest on this debt is not tax-deductible − so it’s doing nothing but eating into your income.

While this is the case, paying interest-only on any investment debt will free up a bit more cash to throw at your mortgage.

And this should put you in a position to clear your mortgage years early, at which point the smartest strategy would be to switch back to principal and interest on your investments, and hit the accelerator on your net worth.

Nicole Pedersen-McKinnon is author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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