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.
Alternatively, if you query it based on your income, you’ll get a different take. An income of €70,000, for example, corresponds with a net worth of €168,500, while a gross income of €150,000 means your net worth could be as high as €1.1 million.
your net worth
Knowing what your net worth is can give you a good view on your overall financial health but, more than that, it should be put to good use by working out how to improve it.
Obviously, the easiest way to improve it is to increase your assets, but unless you’re expecting property prices to rocket, it’s best to also look at reducing your liabilities.
Reducing your debt
The easiest way to reduce your debt, and one which doesn’t require any additional contributions from you, is to switch to a lower interest rate.
While your hands might be tied when it comes to switching mortgages in the current market, you might be able to find another provider if you have other personal debt piling up, such as credit cards and personal loans. For example, if you save with a credit union, you could try and switch a personal loan from a bank to them, if the rate you are offered is lower.
If it’s a credit card that is proving to be troublesome, you could try seeking out a provider that offers an interest-free introductory period. At the moment, Permanent TSB is the only credit card provider doing so, although AIB does offer a special rate (3.83 per cent for 12 months), as does Bank of Ireland (3.9 per cent) and Ulster Bank (3.9 per cent).
These providers will, however, only want to take on what they perceive to be “good” customers, so if you are in arrears or have missed repayments, you might find it difficult to switch.
The other option is to increase your repayments, but this may be difficult at a time when there are so many other pressures on your finances.
Increasing your savings and investments
Just like restructuring your debt can reap rewards, so too can paying closer attention to your savings and investments strategy. If you have money lying in an account earning little in interest, it really is time to get it working for you.
If it’s your “rainy day” account, which you are nervous to lock away for a long time, you can get a better rate of return – and still have easy access to it – by taking it out of your current account where it’s possibly earning a rate of about 0.01 per cent.
KBC Bank for example, offers a rate of 2.6 per cent on its instant access account, while Rabodirect offers 2.25 per cent. On this basis, the opportunity cost of leaving €20,000 in a current account is about €500 a year.
For regular savers, the best rates on the market currently come from KBC and Permanent TSB, which both offer 3.5 per cent on amounts up to €12,000 and €50,000, respectively.
Rein in your purchases
The more money you put towards the “asset” side of your financial statement, the less important the liabilities side, and the stronger your overall financial position will be.
In this regard, consider every significant purchase you make carefully. When it comes to cars, for instance, the advice is to buy one that lasts and lasts. Only when it’s ready to fall apart should you consider buying a new one, given the level of depreciation.
However, if you like the certainty offered by a newer vehicle, you can keep your balance sheet in good order by saving to buy a new car every few years, rather than taking out a personal loan.
This will reduce your overall expenditure by about €4,000 for example, based on a loan of €12,000 over five years on a fixed rate of 12.6 per cent.
Invest all windfalls
If you’re lucky enough to come into money – be it a raise at work, winning the lotto or an unexpected gift or inheritance – don’t be tempted to fritter it away.
Spending it on essential items that you previously couldn’t afford is one thing, but upgrading your television or your money- guzzling car with your windfall is quite another. Invest the money instead. This will help the asset side of your balance sheet grow.
This advice also extends to those fortunate homeowners on a tracker mortgage. If you are benefiting from the recent 25 basis point cut in European interest rates, don’t be tempted to spend the extra money left in your bank account (about €45 on a €300,000 mortgage). Instead, if you can afford it, keep your repayments at their earlier, higher level.
Based on the aforementioned €300,000 mortgage, an extra payment of €45 a month would take 18 months off the term of your mortgage and save you about €4,000 in interest if you were to keep it up over the life of the mortgage.