If someone were to ask you how wealthy you are, how would you respond? Ignore the fact that it’s taboo to talk about money in front of others for a moment. For many people, they’d share their take-home pay. While income is one measurement of wealth, it’s not necessarily the best.
You may have heard of the saying, “it’s not what you earn, it’s what you keep.” You could make millions of dollars as a Hollywood actor, but if you spend every dime and save nothing, are you really wealthier than someone who diligently saves 10 percent of their income throughout their working career and ends up with a sizable retirement nest egg of $1.5 million?
There are two main measures of wealth: income and net worth. Let’s take a look at both right now.
Income
Your income is how much you earn. For many people their income is simply what they earn from their full-time job, but there are other ways to increase the amount you take home. For example, you can get a part-time job or rent out part of your house to tenants. “Side hustle” is another popular way to boost your income. You could rent out your property on Airbnb, drive for Uber or housesit; the opportunities are endless!
While earning a lot of money certainly makes life easier, you don’t want to spend every penny you earn. That’s why it’s worth the effort of creating a budget. By preparing a budget and reconciling your spending, you can help keep your spending in check.
Increasing your income can mean buying a better house and car, but be careful of falling victim to “lifestyle inflation.” Lifestyle inflation refers to how our spending tends to increase throughout our careers as we get promotions at work. It’s ok to increase your spending a little, as long as you increase your savings.
Net Worth
Like most people you probably know your income, but do you know what your net worth is? Calculating your net worth is a little trickier. Your net worth is the difference between what you own (your assets) and what you owe (your liabilities or debts). Examples of assets include the family home, investments and saving, while liabilities include your mortgage, student debt and line of credit.
Figuring out your net worth may sound complicated, but it’s actually quite simple. The easier way is to gather all your financial statements and add up the various amounts in Microsoft Excel. Alternatively, there are plenty of free net worth calculators online. Here’s the basic formula for net worth:
Net Worth = Assets minus Liabilities
So what should your net worth be? The Globe and Mail published a handy table that shows what net worth to aim for at various ages. That being said, this is only a rough estimation. Everyone’s net worth is different depending on their financial situation, but at least it gives you something to aim for. Your net worth is arguably the better measure of wealth than income, as it shows how you use the money you earn.
So there you have it, how to calculate your net worth. Need some help figuring out your net worth? We have a team of experts happy to help you crunch the numbers. Feel free to contact our office today.
