How much are you worth?

I know; you are priceless. Just like the rest of us! That isn’t quite what I meant. Actually there are a lot of answers to this question. When you start a business there is a decision of what to charge (your worth), there is a self-confidence answer (self-worth) and there is a personal finance answer of your net-worth.

Can you confidently tell me you net-worth in £GBP or $USD?

Most people we ask this question to don’t really know. They start adding up, how much is my house worth? What is my car worth? They have a rough idea but no real clarity.

How do you calculate your net-worth? The first step to change is to take a good look at where you are right now. If you don’t know your starting point it is difficult to know if the change you are creating is moving you in the right direction or not. If you can’t clearly give a £ or $ figure for your net-worth then this article will help you figure it out.

After all, what gets measured gets improved

What is your net-worth?

The common definition is the value of your assets minus your liabilities. Even the definition has technical terms in it and there is huge debate as to what is a liability or asset!

Katie and I calculate our net-worth by totalling up all of our assets (investment property, stocks & shares and cash in our emergency fund) in a spreadsheet and then listing all of our debts (mortgages on the investment property, credit cards, debt etc.) and calculating the difference. This then gives us a £££ (this is the symbol for the British currency pounds) amount that tells us the cash we would have in our pockets if we sold everything right now.

We do this every single month at our monthly finance meeting (normally with a tasty breakfast out) and then discuss the results. We get very excited to see if it is moving in the right direction or not! Is it weird that the monthly finance meeting is one of the highlights of our month!??!

What gets measured gets improved. Just the act of measuring your net-worth helps you become conscious of it and take action to move it in the right direction.

And with a nice coffee and breakfast what is there not to enjoy?

Find out how to run a monthly finance meeting

The Donegans out for breakfast and their monthly finance meeting
Donegan Monthly Finance Meeting – Breakfast Berlin

After an incredible breakfast out, we are calculating out net-worth and doing our monthly finance meeting

Why bother calculating your net-worth?

Have you heard the expression what gets measured gets improved? I hope so, I’ve already used it twice in this article.

A close analogy to personal finances is body weight/health. In your twenties you are fit and healthy and moving lots. Then you get a desk job and move a little less and still keep eating. You put on a few extra pounds each year which you don’t really notice. Eventually; at about 40 years old you look down at your body and think “where did that come from!!??”

If you were measuring your weight or body fat % once a month and noticing if it was trending up or down you could do something about it and take control. But the lack of measurement means you don’t notice the small movements day to day, week to week or month to month. If you aren’t measuring, how can you know if you are making progress or or heading towards a future you don’t want.

Do you know if you are making progress on your personal finances? Do you know if you are better off this year than last? Do you know if in the last decade you have improved your situation or not? I am sure a lot of you have a feeling that you have, but can you empirically say so?

If you aren’t measuring your net-worth and checking to see if it has moved in the n right direction or not, you are leaving one of the most important areas of life up to chance.

You are drifting down the river of life with no idea if you are heading towards financial destruction over a waterfall or a wonderful retirement of wealth!

Katie and I took control of our net-worth around about a decade ago and have been tracking it consistently for the last 10 years. It is AMAZING the difference this focus has made to our lives. It creates positive discussions every month about how we can work together to create the financial future we both want.

Alan – Where did this come from?

If you eat a little too much, don't move enough then the belly creeps up on you without you noticing.

Just the act of working out your net-worth, monthly can change your financial destiny. It is one of the most important first steps in taking control of your finances. This is the content from week two of the Rebel Finance School, which is a free course that Katie and I run to help people take control of their finances!

How do you actually track your net-worth?

This first time I did this exercise I was on a training course and didn’t have very much at all. I was struggling to find things to put down. I thought “I own a computer, some clothes and a sofa! Does that count?”

I was adding anything I could to get above zero! If this is you then that is ok, take a breath and we can work on improving this figure together. We no longer include things like computers, sofas and cars because, yes they have value but they aren’t an asset.

It can be a bit more confusing as to what to include or not. There are lots of different thoughts on what should be included in your net-worth and what shouldn’t. I am going to tell you what Katie and I do and why we do it and I am going to let you make up your own mind as to what you want to include.

What actually goes in your net-worth spreadsheet?

  • Assets
    • Cash in your emergency fund
    • Investment accounts – ISAs, SIPPs, stocks and shares (if you are American this is 401ks, roths etc.)
    • Bonds (you will know what this is if you own them, if not then ignore it for now)
    • Properties – a current valuation of the investment properties we own. We do not include the home we live in but we allow for that further down the spreadsheet. Read on for more about why we do this below

The Donegan definition of an asset is anything that puts money in your pocket. i.e. an investment property brings in rent each month, your stocks and shares go up in value. We don’t include your car, because that costs you money every month, nor your house for the same reason

  • Debts
    • Credit card debt (if you pay this off monthly then you don’t need to include it)
    • Loans – do you have any loans you owe?
    • Car Loans
    • Mortgages on the investment properties
    • Student loans

This is all the money you owe other people!

Wealth Building Rate

Assets minus debts gives you your net-worth for wealth building. It’s what will actually provide income for you in retirement.

We acknowledge that you might own things that have value but that won’t provide income in retirement (like the home you live in) so we have an additional list of things that we capture in our net-worth tracker.

Things that have value but that won’t provide an income in retirement

  • Your Home: the amount of equity in the home you live in, value – mortgage
  • Bank Accounts – what cash do we have where? (cash devalues and won’t provide an income in retirement)
  • Cash in business bank accounts (minus tax). Katie was a contractor and we had cash in the company she ran, we wanted to represent this on our tracker before it came out of the company.
  • Savings for things you’re going to spend in the short to medium term (maybe you’re saving up for Christmas presents, a new car, a holiday or a house deposit)

Once you add in these things to the net-worth for wealth building you have your total net-worth.

Total net-worth = Assets – Debts + things that have value but that won’t provide an income in retirement.

What doesn’t go in your net-worth tracker?

This is what we don’t include in our net-worth tracker. Even though it might make us feel richer and happier with our life choices. It is important to see things as they are. Not better than they are and kidding ourselves into feeling wealthy with a nasty surprise in the future! Let’s have an honest look at where we are! This is what we don’t include:

  • Car. We believe this is a liability and depreciating every month and even if we sold it we would have to buy a new one! So we don’t put this in our list as we believe it falsely inflates your net-worth. Accountants will tell you that is an asset because you could sell it to bring in some cash but it doesn’t fit our definition of what an asset is as it strips money out of your pocket every month!
  • Furniture and Stuff. We don’t include anything in our house in our net-worth. Jewellery, TVs, furniture etc. They are probably worth a lot less than you imagine and they aren’t contributing to making you wealthier. In fact just the opposite in 99% of cases!
  • Business Valuation. I never included any of our businesses in our net-worth. They are worth something but putting a figure on it is really difficult and could you actually sell it? Would someone give you money for it? We do include the cash we have in the businesses because we see it as ours (after tax) but we do not include the actual value of the business. If you have a business you might want to include a line for the bank account of the business.
  • Alan – I petitioned Katie quite strongly that I had value and that should be reflected on our net-worth statement. She said that she couldn’t sell me so there for I was not going to have a value on the bottom line. FYI she is open to offer I believe.

Is your home an asset?

Should I include my home in my net-worth? Is your home an asset?

In British culture the home you live in is meant to be one of your biggest assets. You buy as big a property as you can, get a huge mortgage which you pay down over the next 25 years and then you are left with equity in the home at the end. It is a type of forced savings plan.

The problem is that you have to sell the home, downsize or re-mortgage to get to any of that equity! You can’t really live off it, you live in it!

The most extreme example of this was a friend who was desperate to retire. He was around 50, he had no mortgage and a huge and gorgeous flat in an incredible location in London. The flat was worth £3,000,000. Yes you read that right. The problem was he didn’t have anything outside the flat. So he had to keep working.

He had a choice, sell the flat and he could move anywhere and be financially independent instantly, or live in the flat and continue to work as he had to have money for bills, food etc. He wanted to live where he lived. The house you live in isn’t going to pay for your retirement.

The definition of an asset for Katie and I is something that puts money in your pocket. Does the home you live in give you money each month? No! The opposite. It strips money out of your pocket through the mortgage, utilities and repairs. They can be hugely expensive things!

Our definition of an liability is something that takes money out of your pocket each month and the home you live in falls better under this category!

Now you can turn the home you live in into an asset by kicking out your kids and renting out their room to paying tenants (which my Mum threatened to do for years!). This means the home you live in now gives you money each month. There is a cost to this though as you have to share your home.

House hacking is an amazing tool to create wealth and change your home from a liability to an asset. This is a big subject we can talk about another time.

Recently Katie and I have turned our home into an asset by renting it out. We went travelling round the world and rented it out and this has created an extra cashflow for us. We do spend a lot on renting Airbnbs though!

Katie and I decided to have two figures in our net-worth spreadsheet. The first is our net-worth for wealth building (which excludes our home) and the second is our total net-worth which includes our home.

The reason we do this is that when you are calculating how much it takes to retire you want to use the number without the home you live in (your net-worth for wealth building). The home you live in, in retirement reduces your expenses if you have paid of the mortgage but it doesn’t bring in any income to pay for groceries or bills or fun things to do with the grandkids!

In reality the home you live in can be worth a huge amount of money and you could sell it and get that cash out, but then you wouldn’t have anywhere to live!

It is an important distinction to make in working out retirement dates and planning your financial future that we need to include here. We made a video all about this! Our most controversial video yet!

Scroll down for FAQs

How do I calculate my net-worth?

That is the theory and now comes the action. Nothing in your life will change unless you take action. Your homework from this article is to actually calculate your net-worth. We wanted to make it super easy for you to do so we build a free spreadsheet template that you can download and use. Katie also wrote a useful guide to doing it.

Monthly Finance Meetings

Is this a one off project? NO! What gets measured gets improved.

Every month Katie and I have a monthly finance meeting. We SO look forward to it. Amazing breakfast, chat about money and connection.

We have filled out a net-worth tracker like the one linked to about every year for nearly a decade now. It is incredible to watch it grow as we focus on it.

The key thing is to measure and then do something small each month to improve your situation

Monthly Finance Meeting – Donegan Breakfast

Finances should be fun? Why not work on your net-worth with a glass of wine, comfy seat or as we do with an incredible breakfast and fancy coffee!

Nothing is happening

People always overestimate what they can achieve in a year and VASTLY underestimate what they can achieve in a decade. Just start tracking and take small actions every single month. You will be amazed at how these actions compound over time to get you where you want to be.

We got a message this week from someone who had come on the course last year and in the first year improved his net-worth by £10,000. He was shocked that he had made that much progress. He only knew this because he had been tracking.

Start tracking. Make it fun. Do it with the people you live.

Thanks for reading the article and please let us know how you are getting on. We write these articles and create the spreadsheet to help you.

Have fun working on your finances.

Love Katie and Alan

PS read on for the frequently asked questions.

Frequently asked questions

Every time we run Rebel Finance School there are a tonne of questions about this portion of the course. Here are some of the most frequently asked questions. If you have a question use this google form to submit it

This has been a hot question after week 2 of the Rebel Finance School which is all about net-worth.  The challenge comes because there are two types of pensions.  Defined Contribution (DC) and Defined Benefit (DB).

A defined contribution pension means you know what you are putting into it (contribution) on a monthly basis.  e.g. you are putting in £300 a month.  What we don’t know is how much that is going to grow to at the other end when you retire.  This is easy to take a snap shot of; you just look up the current valuation in your paperwork or online and put that in your tracker.

Defined Benefit pensions are harder to work out.  This is because they sometimes don’t give you a current valuation they give you an annual amount that you will get in retirement. This annual amount you will get in retirement in the defined benefit.   If you look in your paperwork they should give you a figure for; if I stop working now and then retire at retirement age I will get £XXX or £$$$.

DB Pensions are far more common for government employees.  They aren’t really used in the private sector anymore as they are seen as more costly.  Katie and I have friends that work for the NHS and as Teachers and they both have DB pensions.

Our advice to them is to take the amount they would get when retiring if they stopped working currently; multiply that number by 25 and put that in your net-worth tracker.

Let’s take an example: if you were 35 years old and on your pension paperwork they predict if you stop working now then you will get £3000 annually in retirement at age 68.  Then take the £3000 and multiply it by 25 (this is the inverse of the 4% rule which if you want to know more about read “How much do I need to retire”).   £3000 * 25 = £75,000.

This simple sum gives you an estimate of the size of pot you would need to have in index funds to be able to have £3000 a year in retirement.   The idea is that this gives you a snap shot value of your pension right now and how much it might be worth and gives us some numbers to be able to work out if you have enough to retire, if you need separate pensions or how much you need to cover the gap till retirement age if you retire early!

This is a lot more information behind this valuation.  If you are on the course Rebel Finance School then keep coming and we will unpack this as we go.  If you aren’t on the course read “How much do I need to retire” and that will give you an idea of the maths behind our reasoning.

Katie and I maintain two numbers for our net-worth.  Net-worth for wealth building (which excludes the home we live in) and total net-worth (which includes it).  The reason for this is that even though your home has a value it isn’t going to bring you any money in retirement unless you rent it out.

If you use the spreadsheet Katie has created here then it has a separate section that captures the equity in your home. You put in the amount the home is worth and the amount you have left on your mortgage and the formula auto calculates the equity in your home and includes it in total net-worth.  If your house is worth £300,000 and you owe £100,000 on the mortgage then the equity or value you have within the house is £200,000.

The spreadsheet automatically adds the £200,000 (difference between value and mortgage) to the total net-worth.  Neither show up in the net-worth for wealth-building.

There is an argument to be made that if you are underwater on your house i.e. you owe more than it is worth so you have a negative value that this should show up on your overall net-worth as you will have to pay this off.  But this is a rare case.

For simplicity neither the mortgage or the value of the house show up in the net-worth for wealth building.

We don’t include a value for our business in the net-worth tracker.  The reason for this is we just don’t know how much we could sell it for or if we ever would!  It feels like a fake valuation and unlikely that we would actually get a value for it.

This would change depending on the size of business but if you have a multi-million pound business you probably already have financial advisors and don’t need us!

However, if like Katie’s company, we have a cash balance that will be ours (we just haven’t taken it out yet) then we include it after tax.  So if we have £10,000 in cash in the business that we know isn’t needed and eventually we will distribute it we will take tax off (we use 20% as our estimate in the UK for our situation) and then add it to our net-worth.  For this instance we would add £8,000 to our net-worth tracker under a newline entitled Business Bank Account.

The Rebel Business School has NEVER shown up in our net-worth because I can’t really put a value on it and I don’t own all of it.

Katie owns 100% of her company. We don’t put a value for the company but we do add in the cash balance with tax taken off.
If we ever did sell the companies it would be a nice bonus later on but we don’t rely on it.  We look at what we have now in the financial snap shot not a future prediction.

We don’t put a value for Katie’s business as if she stops working in it then the money stops coming.  Katie was a contractor and the business would die when she stops.

High interest rate savings accounts generally pay slightly less than inflation. So if you have money in a high interest rate savings account that is getting 5% it is barely keeping up with inflation currently.
 
Our opinion is that’s not really an asset as the money is just sat there, not really doing anything. It is obviously much better than having it under the mattress earning no interest at all!
 
When you compare a high interest account to an index fund that earns over 10% a year over the long run the high interest interest rate savings account pale in comparison.
It does have value, that is why we have put it in section 3 of the template, things that have value. 

How we would calculate the value of your DB pension to add to the net-worth tracker is to take the annual benefit you will receive on retirement, multiply this by 25 and add that value to the sheet. 

For example if you were to stop working now, at age XX you will get £5000 a year.  You multiply £5000 * 25 = £125,000.  This is the value you put in the tracker.

If you are due to receive a lump sum plus the yearly amount you would add the lump sum to the yearly amount *25 to give you the total.

This maths is based on the 4% guideline which is used to calculate how much you need to retire.  Find Alan’s article on the 4% guideline here