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    Personal finance 101: Calculating your net worth

    When it comes to money, it can be hard not to compare yourself to others — and this is especially true with the big ticket items, like your car and house. But, before you start beating yourself up because you feel like you're falling behind financially, there’s only one number that tells us where we stand: our net worth.


    What is net worth? 

    Your knowledge of net worth has likely been Googling what celebrities' net worth is and wondering how it is humanly possible to be "worth" such a significant amount of money. But, rather than focus on the fancy cars you don’t drive, I’d recommend taking a look at your actual assets and liabilities today, to give you perspective on your financial position, and what your financial priorities should be.


    How to calculate your net worth

    The first step when calculating your net worth is to list all of your assets and all of your liabilities using today’s values. Assets are cash and property that you own, which hold monetary value, meaning it can be used to pay an obligation, it will pay you money, or you anticipate it will grow in value over time. Liabilities are debts you owe, obligations you need to pay, or property that declines in value over time.

    Step 1: List all your assets and the value of each. Think: if I had to sell this today, what could I get? 

    Common assets include:

    • Cash
    • Investments, RRSP, TFSA, RESP,  stocks, bonds, crypto currency, commodities, rental properties, and certain insurance policies
    • Real estate you own
    • Vehicles and equipment you own
    • Valuables like art, jewelry, collectibles, etc…
    • Your business

    Step 2: List all your liabilities: who’s owed, due date, balance owing and interest rate.

    Common liabilities include:

    • Mortgage
    • Credit card debt, unpaid bills
    • Student loans
    • Vehicle loans/financing
    • Any schedule of payments you’ve agreed to pay: phone, internet, subscriptions, etc. 

    Once you know how much your assets are worth, you subtract that total from your total liabilities or debts owed. The final result will be your net worth.


    How often should you calculate your net worth?

    You can calculate your net worth as often or as seldom as you'd like, but it's best to check every quarter or once per year. Because most of the numbers we consider in our net worth calculation are high costs, it may not move dramatically month over month, but you can see big jumps with your bottom line year over year.


    Why does your net worth matter?

    Knowing your net worth is important because it allows us to understand our money better. It helps us determine where we stand, focus on where we'd like to be, and provide us with the motivation or encouragement to continue moving forward with our financial plan.

    Whether you need to repay your debt, reel in your spending or focus on savings, your net worth can give you a starting point for goal-setting.

    Numbers and money are deeply connected to our emotions, and your net worth is no different. So, it's a good idea to reflect and determine how this number makes you feel after doing the math. Then, consider how you benefit from your assets and how your liabilities affect your overall total.

    Take your mortgage, for example. The debt brings your net worth down, sure. But, does it matter as much as the feelings of stability and permanence your home provides?

    Of course, there are no right or wrong answers. However, it's an excellent time to determine your financial goals based on your final number.


    How can you increase your personal financial net worth?

    Perhaps the one thing you care most about after calculating your personal financial net worth is what you can do to increase your assets and decrease your liabilities.

    Assets put money in your pocket, or increase your net worth. Liabilities take money from your pocket, or decrease your net worth. 

    To get your net worth moving in the right direction, you’ll want to create a personal financial plan, which will give you a detailed long-term strategy to increase your net worth. 

    1. Determine your household budget

    We have a great blog on how to build your budget. It’ll help you manage your financial life to the fullest.  

    2. Stop the bleeding 

    Review all your recurring expenses and stop any unnecessary payments. These might include subscriptions you don’t use, or extraneous entertainment expenses. 

    3. Create a personal financial plan

    Set long-term financial goals and make a strategy to reach them. This includes getting on track for retirement. 

    4. Start paying off debt

    Debt makes it difficult to make progress in your net worth. Sort your list of all your liabilities and make a plan to start eliminating it. There are three strategies to tackle debt: 

    1. Pay off the most expensive debt first. This includes high interest debt, like credit cards, which charge you 20%! 

    2. Pay off your smallest debt first, like bills in arrears. This helps you get some early wins to build momentum. 

    3. Pay off the most threatening debt first. What debt is hurting your credit the most (credit cards, phone bills, etc.) or most likely to push you into bankruptcy (CRA debt)? 

    If you’re struggling to repay your debt and find that you owe more than you can manage on your own, get some help early to prevent it from getting out of control. Money Mentors is a not-for-profit organization providing credit counselling, education and debt consolidation. Read our blog about small business debt if you’re worried about being in too deep. 

    And if bankruptcy has crossed your mind, you might be interested in our blog on how to deal with bankruptcy. It was inspired by the journey of a good friend (and client).  

    4. Start building your assets by investing

    Assets put money in your pocket, or increase your net worth. With this definition in mind, review your bank statements and think about your personal vehicle and even your home. You’ll find that your house costs (mortgage, property tax, utilities, insurance) take a lot of cash out of your bank each month. Sure, your home may increase in value over time – but not always, and you shouldn’t bank on that. Your home and car are not assets.

    A rental property can be a terrible liability if it has negative cash flow, and worse, if you’d owe money to the bank if you sold it. However, if your rental has positive cash flow, it can be one of the best assets in your portfolio. 

    Speculative investments (stock market or crypto gambling) is not necessarily building assets. Investing to build your assets may include making monthly contributions to an investment portfolio that’s in line with your financial plan, and is tax effective.

    5. Build assets in a tax-friendly way

    Small business owners often have the majority of their net worth tied up in their business, and it's important to start diversifying your assets. Start investing, even a little bit, each month in a Tax-Free Savings Account (TFSA) and/or a Registered Retirement Savings Plan (RRSP). RRSPs save you tax now, while TFSAs save you tax dollars later. Sacrifice and invest as much as you can afford each month starting now, because compounding interest will have your net worth snowballing year over year. Your future self will love you! 

    6. Avoid taking on new liabilities

    This is important: avoid taking on anything new that starts a new monthly withdrawal from your bank account. 

    • Limit unnecessary personal expenses. Pick one or two streaming subscriptions, cancel unused gym memberships and limit SkipTheDishes to once or twice a month. 
    • Don’t buy things for yourself on payment plans. If you can’t afford to pay upfront, don’t do it. This goes for big things like new vehicles and expensive toys (bikes, RVs, boats), but also smaller items like cell phones, appliances, and furniture. New “Buy Now, Pay Later” services are becoming more and more common (think PayBright), and making it easier than ever to take on consumer debt. 
    • Resist the home renovation. It may be tempting, or seem necessary, especially when the bank is willing to refinance your mortgage to pay for it. And you’ll justify it by saying you’re increasing the value of your property. STOP. This is an amazingly common and easy way to set your net worth back big time! 

    Personal finance is personal for a reason. We all have different goals, and we all hold different amounts of debt. The best thing you can do is understand your own situation and avoid comparing it to others who do not have the same assets and liabilities.

    Knowing your personal financial position and knowing what your goals are when it comes to your money are two of the best ways to build a path towards financial success. You've got this!


    At True North Accounting, we help small business owners set up a foundation for success and thrive. Book a meeting with one of our knowledgeable CPAs so we can help you look at the numbers, give you the low-down on how your business is doing, and create a plan for growth.

    Find more Strategic Advisory topics relevant to you and your small business. 

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