Working out your net worth is a vital first step on the road to achieving your financial goals.
You will often hear the term “high net worth individual” used in the world of wealth management to denote those who have wealth above a certain level – one that varies culturally but it is safe to say will be well above that of the averagely well-off person. But how is net worth calculated, and why should you bother to work yours out?
In simple terms, your net worth is the sum total of the assets you own minus those you owe. In essence you are subtracting any financial liabilities you have from all those you own to work out if you are in negative or positive territory. In the wealth management industry it is also typical to exclude a person’s primary residence from their net worth – an important distinction since most individuals’ biggest investment is their main home.
Calculating your net worth might actually be slightly more complex than it first appears, however. It is vital to carry out a thoroughgoing examination of all your financial affairs, perhaps including those of your spouse if you are married (whether your wealth is managed separately or jointly is of course a highly personal decision). It is very easy to leave long-forgotten SIPPs and ISAs out of the equation, for example. The situation is of course further complicated if you are the owner (or part-owner) of an operating business.
Assessing your financial affairs in the round is a vital first step on your wealth management journey and is one of the first activities you will carry out with your adviser. At this stage it can be immensely helpful to have a professional helping to jog one’s memory by asking the right questions, although you can of course get a head-start in the process by working through the checklist below.
Add up your assets…
- Business interests
- Cash deposits and current accounts
- Physical cash
- Equities (including any share options)
- Mutual funds
- ISAs, offshore bonds or other similar investments
- Annuities and life insurance plans
- Pensions (personal and corporate)
- Property (nb wealth managers typically exclude primary residence)
- Physical gold
- Private equity investments
- Collectibles like art, jewellery, vintage cars or fine wine
- Other vehicles (including boats and planes)
…Less your liabilities
- Mortgage(s) or rents payable
- Credit card debt
- Loans (including Student Loans)
- Car loans or other finance
- Home equity loans/Lombard loans
- Taxes due (Income, Capital Gains, Inheritance, Corporation)
- School/University fees
As you might expect, gathering all the necessary records necessary to arrive at an accurate picture of your net worth comprises a large part of the task. However, keeping on top of your financial affairs with good organisation is key part of achieving your financial goals, through the formulation of a sensible wealth management plan.
While it is all too easy to put off definitively sorting out financial matters, the peace of mind taking control can bring is invaluable. Whatever state your affairs are currently in, a professional adviser will be able to help you get organised and have all your finances working optimally.
Regularly reviewing your net worth
Whether you prefer paper-based documents or electronic ones, keeping everything in one place in a physical or digital folder is a good policy – not least because you are likely to want to work out your net worth fairly regularly as your wealth grows over time.
Your financial situation is likely to alter quite radically as you progress through your life – through marriage, having children, inheritance, career progression, liquidity events and so on – and it should be remembered that the the growth in your net worth may not be entirely linear (set-backs such as divorce, economic shocks or fluctuating property prices are of course common). However, your adviser will be able to set a course that will help you be where you want to be financially in the short, medium and long term, with risk management as tight as you require.
In conclusion, although calculating your net worth may seem like a somewhat tedious task it is in fact one of the most important steps in ensuring you achieve your financial objectives and may be a very illuminating and valuable exercise indeed. How else are you to make a fair evaluation of where your wealth stands today and plan for where you would like to be in five, ten or twenty years’ time?
We’ve made it as easy and fast as possible for affluent individuals to meet the wealth managers best suited to their profile and needs – and to start having the kind of in-depth conversations with professionals that are likely to make all the difference to their net worth long term.
Discover which wealth managers precisely suit your needs simply try our online smart tool making sure to specify all your financial planning and investment requirements.