This week, we’re going to be talking about Net Worth. What does that even mean, and how do we build and protect our net worth? This is a subject I’ve been asked to cover by various people who have emailed me, so let’s take a good look under the bonnet of this throwaway jargon term – net worth – so we can get the most from it.

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Introduction

Net Worth. Sounds like a technical term doesn’t it? The use of the word Net, makes it sound all tax-y and official. Like most things financial though, the terms are a lot less scary once they have been explained and unpacked. Now if only we could find someone to do that… Oh, right, yes. That would be my job! Let’s look at this term now following the usual format here on the show, what you need to know first, followed by what you need to do…

What you need to know

1. Net worth is: What you own less what you owe ‘Net’ means ‘less something’. So the net weight of the breakfast cereal you ate this morning, is the total weight of the cereal, minus the packaging. Net worth then, is what’s left after you’ve taken off the debt: What you own, less what you owe. 2. What is included in what you own and what you owe? Everything, but be careful. For example the value of your house less any mortgage is one thing. But if it would cost you £10,000 of estate agents’ and legal fees to sell that property, then you need to take that into account in calculating net worth. When adding up debt, don’t forget to include pending tax bills and loans owed to family 3. Net worth has limited value in isolation A number is useful, but in isolation it is fairly meaningless. The value of net worth is only function of how long that money could sustain your desired lifestyle. Cashflow, or money in versus money out is what matters.

What you need to do

1. Budget: Spend less than you earn Everything comes down to this. Even my richest client is more comfortable talking in terms of lifestyle rather than lump sum net worth. There’s also more info in sessions 3, 4 and 5 2. Protect: Making sure your net worth is still of use if disaster strikes When you are accumulating wealth, you want to make sure that process continues and even accelerates if anything nasty happens to you. You do this with insurance. When decumulating, or spending your money, protecting net worth is about makings sure money passes down to the next generations. There’s more on this back in sessions 7 and 88 3. Invest Wisely Two little words, so much detail! Investing wisely takes in asset allocation, tax planning, keeping costs low, reviewing portfolios and risk management, plus lots more. Lots more on this in various sessions. Look at the podcast index for more.

Summary

This is all very outline stuff. If you want me to cover a bit more detail or if you have any questions, then do get in touch by leaving a comment below.

But there is a bit more detail in my new eBook: Three Steps to Financial Freedom which is available for free as a download from the website. Three steps: Budget, Protect, Invest – this is a theme I will be returning to a great deal over the course of 2015 and building upon too.

If you’re already subscribed to my mailing list, then you should have received your copy already, but if not, signup here

News and Reviews

Up to 16 stone, 2 pounds – boo. Back on it now after the Christmas binge.

Massive thanks to Agadah who left me a review this week.

Next Session Announcement

Next time we'll be talking about planning across generations, another subject I’ve been asked about before. How can you leave money effectively to your children? This is particularly pertinent in light of new changes to pensions happening from April.

If you have a question on this subject, or any other financial query that you want answering here on the show, then the best way to do that is to leave me a voicemail at meaningfulmoney.tv/askpete