In our last issue, we introduced the concept of Net Worth and saw that simply put, it is the difference in value between what we own and what we owe. It’s a numerical snapshot of our financial position at a point in time. In order to take control of our finances and get them moving in the right direction, it’s vitally important that we know our net worth. But net worth alone is only a part of the overall picture. And unless it’s put in proper perspective, it can be misleading.
For example, let’s suppose we have two individuals, Mr. Smith and Mr. Jones, who both take time to calculate their net worth. 
Each takes out a sheet of paper and first writes down the value of everything they possess: real estate, cash, stocks and bonds, RRSP’s, furniture and miscellaneous, automobile, etc. Then they add their values up. Next they list all their fixed debt: real estate mortgage and encumbrances, bank loans, credit cards, credit lines, automobile loans, etc. Then they add up those debt totals. Next they subtract the total debt from the total asset value and arrive at their net worth.
Mr. Smith discovers that his net worth is Two Hundred and Fifty Thousand Dollars ($250,000) while poor Mr. Jones learns to his horror that his net worth is zero (nada). If he sold everything he owned it would just cover his debt. Our first reaction is to pity Mr. Jones and perhaps even envy Mr. Smith. At least I think it’s safe to say that we would all see Mr. Smith as being in a much better position. But that’s not necessarily so. To get the real story, we need to go beyond their current net worth and see where they are coming from.
Looking at the net worth of Mr. Smith and Mr. Jones just one year ago, we begin to see a very different picture developing. While it’s true Mr. Smith’s current net worth is a quarter of a million dollars, and that’s wonderful, just 12 months ago, his net worth was Four Hundred Thousand Dollars ($400,000). At the same time Mr. Jones, who currently sits at a net worth of zero, just one year ago had a net worth of minus Fifty Thousand Dollars (-$50,000).
So, when we look at trends, we see that in one year Mr. Smith’s net worth lost One Hundred and Fifty Thousand Dollars, while at the same time, Mr. Jones’ net worth grew by Fifty Thousand Dollars. In short, based on the current trend, Mr. Jones is on his way to wealth and fortune, while Mr. Smith is quickly going broke.
I’m going to ask you to do a little assignment between now and 30 days from now when you receive your next edition of this newsletter. Take out a sheet of paper and calculate your net worth. Just like Mr. Smith and Mr. Jones did, itemize all the items of value you own and assign their current value (market value, not replacement value ie. what they could be sold for today). Then make a list of all your debt. Not the amount of your monthly payments, but the actual total owing of each debt. Then subtract the debt total from the asset total to arrive at your net worth.
Calculate that net worth effective December 31st of last year. That will make it easier to compare as you, each year, get into the habit at the end of the year of calculating your net worth. I’ve attached to this newsletter a link which will allow you to download a ‘net worth’ worksheet. As you go through the process however, remember:
“It’s not where I am now that’s important. It’s where I plan to be.”
Ahead in these newsletter articles, we’re going to look carefully at how we can get our net worth heading in the right direction. We’re going to see that there are two ways to grow our net worth. Active Accumulation (savings we work for) and Passive Accumulation (savings that amass on their own). We’re going to see exactly how large a net worth and how much annual growth we need, and we’re going to discuss ways to make that growth happen almost without our continued involvement.
So, hang on to your hats. We’re heading somewhere with these articles. I hope you find them informative and very useful. In fact, it’s my goal to play a part in helping you retire independently wealthy. It can be done by understanding some simple economic principles, devising a plan, and following it. It’ll require some discipline and determination, but not a lot else. I’ll show you exactly how it can be done. And I’ll look forward to exploring this in greater detail over the following monthly articles in this newsletter.
Wayne Quirk, Author
"The Money Machine"
wayneq@remax-gc.com
In our last issue, we introduced the concept of Net Worth and
saw that simply put, it is the difference in value between what
we own and what we owe. It’s a numerical snapshot of our financial
position at a point in time. In order to take control of our
finances and get them moving in the right direction, it’s vitally
important that we know our net worth. But net worth alone is
only a part of the overall picture. And unless it’s put in proper
perspective, it can be misleading.
For example, let’s suppose we have two individuals, Mr. Smith
and Mr. Jones, who both take time to calculate their net worth.
Each takes out a sheet of paper and first writes down the value
of everything they possess: real estate, cash, stocks and bonds,
RRSP’s, furniture and miscellaneous, automobile, etc. Then they add their values up. Next they list all their fixed debt:
real estate mortgage and encumbrances, bank loans, credit cards, credit lines, automobile loans, etc. Then they add up
those debt totals. Next they subtract the total debt from the total asset value and arrive at their net worth.
Mr. Smith discovers that his net worth is Two Hundred and Fifty Thousand Dollars ($250,000) while poor Mr. Jones learns
to his horror that his net worth is zero (nada). If he sold everything he owned it would just cover his debt. Our first reaction
is to pity Mr. Jones and perhaps even envy Mr. Smith. At least
I think it’s safe to say that we would all see Mr. Smith as being in a
much better position. But that’s not necessarily so. To get the real
story, we need to go beyond their current net worth and see where
they are coming from.
Looking at the net worth of Mr. Smith and Mr. Jones just one year
ago, we begin to see a very different picture developing. While it’s
true Mr. Smith’s current net worth is a quarter of a million dollars,
and that’s wonderful, just 12 months ago, his net worth was Four
Hundred Thousand Dollars ($400,000). At the same time Mr.
Jones, who currently sits at a net worth of zero, just one year ago
had a net worth of minus Fifty Thousand Dollars (-$50,000).
So, when we look at trends, we see that in one year Mr. Smith’s net worth lost One Hundred and Fifty Thousand Dollars,
while at the same time, Mr. Jones’ net worth grew by Fifty Thousand Dollars. In short, based on the current trend, Mr.
Jones is on his way to wealth and fortune, while Mr. Smith is quickly going broke.
I’m going to ask you to do a little assignment between
now and 30 days from now when you receive
your next edition of this newsletter. Take out a sheet
of paper and calculate your net worth. Just like Mr.
Smith and Mr. Jones did, itemize all the items of value
you own and assign their current value (market value,
not replacement value ie. what they could be sold
for today). Then make a list of all your debt. Not the
amount of your monthly payments, but the actual total
owing of each debt. Then subtract the debt total from
the asset total to arrive at your net worth.
Calculate that net worth effective December 31st of
last year. That will make it easier to compare as you,
each year, get into the habit at the end of the year of
calculating your net worth. I’ve attached to this newsletter a link which will allow you to download a ‘net worth’ worksheet.
As you go through the process however, remember:
“It’s not where I am now that’s important. It’s where I plan to be.”
Ahead in these newsletter articles, we’re going to look
carefully at how we can get our net worth heading in the
right direction. We’re going to see that there are two ways
to grow our net worth. Active Accumulation (savings we
work for) and Passive Accumulation (savings that amass
on their own). We’re going to see exactly how large a net
worth and how much annual growth we need, and we’re
going to discuss ways to make that growth happen almost
without our continued involvement.
So, hang on to your hats. We’re heading somewhere with
these articles. I hope you find them informative and very
useful. In fact, it’s my goal to play a part in helping you retire
independently wealthy. It can be done by understanding
some simple economic principles, devising a plan, and
following it. It’ll require some discipline and determination,
but not a lot else. I’ll show you exactly how it can be
done. And I’ll look forward to exploring this in greater detail over the following monthly articles in this newsletter.
