The power of tracking net wealth for long-term success

Self-delusion is one of the great enemies of being rational and in control of your finances and investments.

We have all seen examples of this when people with significant earnings and a big lifestyle suddenly hit the financial wall and go through a painful readjustment or even bankruptcy.

There are some who go in the other direction and without ever seeming to have any extraordinary income or advantages they are suddenly revealed to be much wealthier than anyone would have expected.

The difference between these two examples is the ability to keep a rough idea of what your level of net wealth is and in which direction it is headed.

That is a hard lesson to learn and one of the most basic building blocks of financial planning but keeping track of your net wealth is powerful on two levels – it helps you know whether your current financial plans are paying off over time and it is a great way of finding out whether your finances are too complicated.

It should be a simple calculation

For most of us working out our net wealth should be fairly simple, the sort of thing that can be worked out on a single sheet of paper or even in your head.

In simple terms it is the difference between what you owe in the form of debts and what you own in the form of assets like property, cash, shares and super.

It is interesting to note that the old term of “net worth” has been rightly scrapped, given that any individual’s “worth” to society and their loved ones should rightfully be independent of their level of wealth.

If working out your net wealth is very difficult, it is a sign that your finances are likely to be unnecessarily complex and overdue for a radical simplification.

There might be a forest of different loans and all manners of complex ownership structures but the important thing is that you need to be able to roughly work out your net wealth progressively over time, so set up a method that is quick and painless for calculating it.

And while you are at it, consolidate those credit card and other loans to simplify the “what you owe” column.

The reason that the calculation is such a powerful financial planning tool is that is reveals exactly where you stand compared to your plans and gives you an excellent tool to continually chart the success of your wealth building plans over time.

This can be a rude awakening

For those who live up to and beyond their means it can also be a very rude awakening to the fact that despite all of their hard work and possibly an excellent income, they are actually going backwards over time and need to rethink their strategies.

Often people with high incomes but a poor financial position are ploughing far too much money into their lifestyle with cars, holidays and extravagant living being a poor substitute for actual financial control and a long-term financial plan.

Keeping track of your “number” over time is also an excellent way of seeing if you are moving towards your financial goals successfully, whether they be savings, a house, debt reduction or retirement.

Either way, financial advisers say that understanding how much money you would have if you sold all of your assets, less your liabilities – and tracking how this changes over time – will never be time wasted.

One of the other benefits of this approach is that it helps to increase the visibility of assets like superannuation, which many people neglect and thus have less ownership of how it is performing over time.

Don’t forget HECS/HELP loans and BNPL

Some debts such as HECS/HELP are also worth including, as are less obvious debts such as buy now pay later plans.

There are some online calculators which can streamline the process, including ones with Morningstar and the government’s Moneysmart.

Another benefit of the net wealth calculation is that this increases the visibility of bad debt that is owed against depreciating consumer assets versus good debt on appreciating assets such as shares and property.

Often those working out their net wealth also find out the extent of their emergency fund or readily available liquid reserves which are well worth prioritising as part of a financial plan.

Most planners recommend an emergency fund of between three to six months of expenses.