Episode 9: Calculating your Net Worth & Setting SMART Goals
Updated: Nov 23, 2018
This week, I showed you how to calculate your net worth, why it’s important, gave you some statistics, and then we talked about how to set smart goals to help you make the most out of your life or business.
WHAT IS A NET WORTH STATEMENT?
A net worth statement is basically a summary of what you own (your assets) minus what you owe (your liabilities). This formula works the same way for an individual, a family, or a business.
So, what’s important about your net worth? We don’t calculate taxes based on it, and unless you’re selling your business, you may not think there’s any purpose in knowing these numbers. Well, here’s a few reasons that I think it’s important to know and calculate on a at-least annual basis:
1. Net worth statements remove the guesswork about what your financial situation is. They are the most accurate measure of wealth there is. As I always say, what can be measured can be improved, so knowing the BIG PICTURE of your finances can give you more certainty, help you make decisions better, and aid you in setting SMARTER GOALS.
2. If you’re married, or you have a business partner, it gives you a mutual understanding of your shared situation. Net worth is pretty black and white – there’s not much room for emotion in it, so it’s a way to show FACT when discussing plans and making decisions.
3. It can easily show you where the areas that are needing improvement are. If you don’t have a lot of debt, or budgets just don’t work for you, use a net worth statement to track where you are and where you’re going – it’s a much quicker process and really gives you the snapshot that you need to make financial decisions.
HOW TO CREATE A NET WORTH STATEMENT
In the video, I showed you how to do the calculation on paper, but I would suggest using an online calculator or spreadsheet.
What You'll Need
All recent account statements or online balances – chequing, savings, RRSP’s, TFSA’s, non-registered savings or investments you might have, stocks, GIC’s, bonds, mutual funds, etc.
List the values of all of your non-cash assets: house or other properties, vehicles, rec vehicles, motor homes, jewelry, art, furniture, other major possessions. You’re thinking of the fair market value here – so the maximum amount you would be able to reasonably sell this item for today.
Next, list and total your debts: credit card balances, line of credit, personal loans, mortgage, car loans, anything you have in collections, etc. If you’ve done the budget video with me (episode 4), you may have already done this part. But for this purpose, we don’t need go through each statement with a fine-tooth comb, we just want the most recent balances that you have.
Plug these numbers into your calculator or spreadsheet, and voila! You have your net worth.
Now, if your net worth is negative, this means you owe more than you own, and of course there is a liability issue here. So, in this scenario, my suggestion would be to put a lot of your energy into paying down your debts – again, see episode 4 for my tips on that.
On the flip side, if you have a positive number here, the overall goal should be to increase your net worth as you age. Of course, just like the stock market, you will see fluctuation here, but the overall trend should be that it increases over time. If you’re tracking it monthly or even yearly, and you’re not seeing growth or you’re seeing a decrease, then it’s time to take a harder look at what financial decisions you’re making that could be improved.
So, it’s difficult to say what an ideal net worth is for any one person or business, because of course there are so many different factors that play into it - age, location, how big your family is, how close you are to retirement, etc. So, in order for you to set your net worth goal, I’m gave you 2 numbers that may help.
1. Formula that is based on your age. So this formula assumes that you’re not doing a lot of net worth building for the first 25 years of your life, and also that your goal is to build you net worth by a 5th of your annual income each year.
[Your Age - 25] x [Gross Annual Income ÷ 5]
EXAMPLE: 32-25 = 7 x 100,000/5 = 20,000 = $140,000
So, this is a basic starting point – depending on your particular lifestyle, or goals this may not be even close for you, but it may be helpful to get you under way.
2. Statistics – these are not based on age or family size, just location, so again, take it with a grain of salt.
In 2016, the average net worth of an Alberta family is $290,500. In Canada overall, the average net worth is $295,100.
Check out the entire 2016 Survey of Financial Security in order to filter the averages by age or province.
SETTING SMART GOALS
I wanted to tie these topics together because Net Worth is such an actionable, measurable thing to set goals with, so it makes a really good example, BUT the tips I am sharing in regards to goal-setting are completely universal in whatever dreams you’re chasing, from business to personal, fitness, financial, relationships, academic achievements, anything!
I meet a lot of small business owners and individuals who’s financial goals consist of “get more business”, “pay down debt” or “increase my income”. These are a great starting point, but if you don’t drill down onthese, you’re not going to gain any traction. So, I want you to go from having this fuzzy plan to have an actionable, well-designed strategy to get to your objective by implementing the principals of S.M.A.R.T goal-setting.
S – Specific: Drilling down that “increase net worth” fuzzy plan into “I am going to increase my assets by $8,000 amount and decrease my liabilities by $2,000 in order to have an overall increase of $10,000”. Having this focus creates a power that pulls you and your resources toward it.
M – Measurable: We need to be able to track our progress. For the net worth example, a great way is to re-calculate your net worth at certain intervals. Not only does this give you the knowledge of where you’re at, it’s also a powerful motivator. It’s the same thing as weight loss, we want to continue to weight ourselves and take measurements and photos in order to keep the fire going.
A – Achievable: This is the HOW portion of the goal - where we are putting a plan in place to achieve this goal. For net worth, it may be budgeting in order to pay down debt within 3 years, or starting a new savings plan with an investor. For a business goal, this would likely be WHO is performing WHAT TASK in order to get to the end goal.
R – Realistic or Relevant: If you’ve really gone through the achievable category, this is where you are going to realize whether or not your goal is representative of reality. I want you to have big dreams and have your head in the stars, but I also want your feet on the ground, so setting a goal that is attainable should be a focus. For net worth, it’s important that you crunch the budget numbers and make sure that it’s feasible to pay off the debt or make room for a new investment.
T – Time-focused: This is where we set a deadline. For net worth, you want to have an overall increase of $10,000, but by when? 1 year, 2 years? This is all part of the equation and a very important one. You don’t have to have just 1 deadline either – you can set small intervals to celebrate milestone successes – for example maybe every time your net worth increases by $1,000, you get your favorite coffee or book a massage.
Setting the goal in this way really helps to keep you on track and keep you committed. You can read more about smart goal setting in some books I recommend. Check out Before Happiness by Shawn Anchor and Goals! by Brian Tracy.
You don't need to wait until January 1st to set a smart goal. What goals will you be setting for your business or life this year?