Your net worth means the positive amount of money that you own across all your assets, minus what you owe. It is important because it will give you an idea of how close you are to retirement. The overall goal to reach financial independence or retirement is to have enough income to support your life without working. Your income could come from different sources. I’ll provide 2 examples:
- Retirement Savings
After years of contributing to your retirement and savings accounts, you are going to start to withdraw the equivalent amount to help you pay your daily expenses. It could be once a month or twice a month. For example: Right now your employer uses direct deposit to pay your salary into your bank account. After retirement, you’ll be taking the money from your investment accounts and depositing it into your chequing account. You can either sell your stocks, bonds, ETFs or use the dividend from your investments.
2. Real Estate
Most people downsize after retirement. At this point, retirees live without children and their house is too big for just 1 or 2 people. Also, the majority of retirees don’t have a mortgage anymore and with the house appreciation over the years, means that they can sell their house, move to a smaller place and bank the extra.
How to calculate my net worth?
To calculate your net worth you need to make 2 lists:
- On the first one, write down all your assets: House(s) value, car value, balance in all your savings, chequing, retirement and investment accounts. Add them up and come up with your total assets value.
- On the second one, write down every single thing you owe: Total mortgage balance, line of credits, student loan, car loan, credit card, etc. Add them up and come up with your total liabilities value.
After you have those 2 amounts, deduct the liabilities from the assets to find out your net worth, is that simple! There are many free online calculators. I recommend this one by the Ontario Securities Commission. But, what happens now?
- If your net worth is negative, uh oh, you need to start praying off all that debt right away.
- If your net worth is right above 0, start a budget right now and start a strong savings plan. Check out my Budgeting 101 post! Aim to increase your savings rate every single year. Start with 5 percent of your net pay, then challenge yourself and increase it to 10%, then 15% until you are able to save 70%. It is possible, it is a choice. You choose to save or spend, is that simple.
Final Recommendations
Track your net worth every single year or twice a year, and compare it to your retirement amount. Does your current net worth mean that you have 10% of your retirement amount? Maybe 30%? Watch it grow every single year. It will motivate you to keep increasing your savings and estimating the number of years remaining until you are finally free, retire and do whatever you like.
You can do it, I know you can!
Love,
Alexis
