To someone who doesn’t have a lot of assets, knowing their net worth might seem pointless, but experts say it’s an important indicator of financial health, no matter how big or small the number.
“At the end of the day, it’s not about how many zeros you have, it’s really about whether the net worth you have reflects that you’re on track toward your financial goals,” said Brenda Hiscock, a certified financial planner at Objective Financial Partners.
Your net worth is measured by adding up the value of all the assets you own and subtracting your outstanding liabilities. The result gives you a snapshot of your overall financial picture.
Assets can include money in your bank account, investments, the value of your home and other properties, the cash value of a life insurance plan, the resale value of your vehicle and any pension plans.
Liabilities are essentially what you owe and can include the mortgage on your home, lines of credit, credit card debt, student debt and auto loans.
Hiscock says when it comes to your liabilities, it’s important to distinguish between good debt and bad debt.
Related Stories
“There’s good debt, sort of, a mortgage, student loans because a student loan can increase your future earnings potential. But what we really want to look at on a net worth statement is whether there’s credit card debt … that tends to be bad debt,” she said.
“The net worth statement helps us to really look at each piece and determine what the best way forward with them is.”
She says a typical timeline to review a net worth statement is once a year.
For a young person starting out who may have few assets, or even a negative net worth, Hiscock said there are still benefits to tracking your financial health.
“I work with quite a few young people and I do find they love seeing their net worth year-over-year. It’s motivating to them,” she said.
Tony Salgado, president of AMS Wealth, said a net worth statement can also be a wake-up call that your financial well-being is not moving in the right direction.
He gives the example of someone who gets a raise or a promotion at work, but ends up spending the extra income on dining out and other discretionary expenses instead of building up their assets.
“So even though in this situation you have someone that has more cash flow coming in, they’re spending more,” he said.
“In that case, their net worth is not going to be growing. They’re going to be decreasing their net worth. It’s important for that young person to see if they’re going in the right direction.”
For someone that wants to build their net worth, it comes down to putting more money into the assets side rather than the liabilities.
“Step by step, if we manage our discretionary spending, we improve our cash flow, we take the cash flow and invest it in either a TFSA, RRSP or an alternative investment—you’re slowly now moving your net worth in the positive direction,” Salgado said.
In addition to being a key indicator for your own use, knowing your net worth can also be crucial information for other professionals, such as a lawyer working on your will or gauging how much life insurance you may need, Hiscock said.
“For example, young people out there buying homes, and if they have a young child, life insurance is so, so important. The net worth statement can say, ‘OK well we have this much debt and if we pass away, we want to have that protected and we also want to protect our future income,’” she said.
