Balancing act: keeping a tot on your net worth
Adding up your liabilities and subtracting them from your assets can be a worthwhile exercise to determine your overall financial health
Although calculating your “net worth” has lost its credibility somewhat since the days of the boom – remember Bank of Ireland’s infamous assertion that there were 33,000 millionaires in Ireland? – it can nonetheless be a worthwhile exercise to determine your overall financial health.
Put simply, working out your net worth involves adding up all your liabilities, and subtracting them from your assets. Just like a company’s balance sheet, if you come out with a positive figure, you’ll know that at least you’re going in the right direction. Conversely, if your liabilities are greater than your assets, you will have a negative net worth.
Be prepared, however, to see a lower figure than you might have envisaged. Since the peak in 2007, the net wealth of Irish households has fallen by about 37 per cent – no surprise given the impact of falling house prices.
Why bother with your net worth?
It’s not worth getting too excited about your overall net worth figure. Sometimes it can appear inflated while at other times it might look at little lean. What is useful, however, is the insight it gives you into how your debts weigh up against your assets, and whether or not you’re moving in the right direction.
It can also be informative to do the exercise after an interval of several years, to evaluate your financial progress over this time – and those currently with a negative net worth, thanks to the impact of negative equity, might get a more favourable outcome as a result.
When completing the questionnaire be realistic and base your figures on today’s asset values – not on how much you actually paid for them, or how much you wish they were worth. Your recently submitted property tax valuation should come in handy in this regard – or perhaps it might pose a moral dilemma. Do you choose the figure you submitted to the Revenue, which was at the lower end of the scale, or the higher figure which you think it might actually sell for?
Benchmarking your net worth
Given that everyone has different financial priorities, working out where you fit in may be of interest.
The Central Bank asserted last month that we’re each worth about €101,962 (on average) – and the good news is that it’s on the rise. Net household wealth increased by 1 per cent during the last quarter of 2012, according to the bank, adding about €2,000 to each household worth.
In the US, CNN Money provides an interesting calculator at: http://iti.ms/14Ov4C5. This shows you how you stack up against other people of a similar age/income bracket. For example, if you are 35, you will see that the median net worth for your age is €51,575; if you’re 65, you should expect a substantially higher median net worth of €232,000.