If you’ve seen the new financial reality TV show “Million Dollar Neighbourhood,” you may have some inkling of the concept of net worth. The objective of the show is to raise a British Columbia town’s collective net worth by $1 million, defined by 100 families that appear on the show.
Net worth is simply the amount of money you have when you subtract the total of all liabilities from all assets. This is not always visible. You could have an apparently affluent couple with a million-dollar-home but if they have a million-dollar-mortgage to accompany it, plus credit cards and other debts and no financial assets, this apparently enviable couple actually has a negative net worth.
At the other extreme, you might have a modest couple living in a tiny $200,000 bungalow in a nondescript neighbourhood. But for all you know, that couple has no mortgage at all, no debt of any kind and say $500,000 in registered retirement savings plans, tax-free savings accounts and other savings. Their net worth might be a $1 million, making them far “richer” than the couple with the showy million-dollar home. This theme was of course explored in the book, The Millionaire Next Door. The point is you can’t judge net worth from external appearances. The first couple we described might be an example of what the Texans call “big hat, no cattle.”
In his book, The Smartest Money Book You’ll Ever Read, Dan Solin devotes a chapter to net worth. There he reminds readers that “net worth is the number you want to maximize.” He counsels against borrowing to improve your lifestyle, since borrowing means adding more liability (debt) to your personal balance sheet. Debt is the enemy of wealth. As he says, someone with $3 million in assets but $4 million in debt is not wealthy: they have a net worth of negative $1 million!
Toronto-based financial planner Frank Wiginton puts a lot of focus on net worth too in his recent book, How to Eat an Elephant. He says it’s important to make three categories, to facilitate tax planning:
- The assets and debts you have
- Those your spouse has
- Joint assets and debts
There are a number of online tools available to help you calculate your net worth – there’s an app for that for the iPad, among other devices, as well as tools on GetSmarterAboutMoney.ca and on other financial sites such as mint.com.
In short, individuals should be running their household finances just as a business would: keep assets higher than liabilities and strive to create a surplus between what you earn and what you spend and your net worth should keep soaring ever higher.