Net worth: the one number that says more than your bank balance
Your balance says what you have today. Net worth says which way you are heading. How to work it out and what to do with it.
A bank balance is a moody number. The day after payday it looks fine; three days after rent and a loan payment it looks grim — even though nothing of substance happened in between. Judging your financial situation by it is a bit like judging the climate by glancing out of the window once.
Net worth is immune to that noise, because it counts everything at once.
The definition fits in one sentence
Net worth is everything you own minus everything you owe.
On one side: cash, current accounts, savings, investments, a flat, a car, equipment worth real money. On the other: the mortgage, personal loans, the credit card balance, financed purchases, money borrowed from family.
The difference is your net worth. It can be negative, and for the first years after taking a mortgage it usually is — that is normal, not a reason to panic.
How to work it out in half an hour
Step one: list what you own. Every account balance, cash in your wallet, deposits, bonds, funds, shares. Then anything worth more than a few thousand: property, a car.
Step two: list what you owe. The remaining principal on loans — not the sum of the remaining payments. A payment includes interest you have not paid yet and will not pay at all if you clear the loan early. Counting the debt as the sum of future payments can overstate it by a small fortune.
Step three: subtract. That is the whole method.
Valuing things: lower is safer
Valuation is the biggest trap. Property and cars tempt you into the optimistic number — a neighbour listed something similar at that price, a website values the car at that.
A practical rule: write down the price at which you could sell it within a month if you had to. Not the asking price, but the one that makes the phone ring this week. An understated figure can only surprise you pleasantly. An overstated one builds a picture of wealth that cannot be turned into money.
Anything worth less than a few thousand is not worth listing at all. A television and a bicycle will not move the result, and re-valuing them every quarter will put you off the whole exercise.
The number alone means nothing. Its direction means everything
This is the heart of it and the most common misunderstanding. A net worth of £50,000 is neither good nor bad — it depends on your age, your income, whether you just bought a flat and whether a child arrived this year.
The sensible question is a different one: has this number gone up or down over the past year?
Which is why only repeated measurement is worth anything. Once is trivia. Four times a year for three years is a chart, and it shows things a monthly budget cannot:
- that a mortgage being paid down lifts your net worth every month, even when nothing accumulates in your account
- that a car bought on credit drags it down twice over in the early years: it loses value faster than the debt shrinks
- that a pay rise followed by higher spending does not change the slope of the line by a single degree
What to do with the result
Measure quarterly, not monthly. Month-to-month swings are mostly noise from pay dates and payment dates. A quarter is long enough to show a trend and short enough to react to.
Record the components, not just the total. A £20,000 drop means one thing when a kitchen was refitted and something entirely different when a credit card balance is climbing. Without the breakdown you will not be able to tell them apart six months later.
Do not compare yourself to anyone. Published "median net worth at age X" figures account neither for who was given a flat by their parents nor for who spent a decade repaying student debt. The only honest comparison is you, a year ago.
When negative net worth is fine and when it is not
Negative net worth just after buying a home with a mortgage is the textbook case: you carry the debt in full, and you should be valuing the property more cautiously than what you paid once fees and tax are counted. Every payment moves you towards positive.
The worrying picture is a different one: negative net worth that deepens quarter after quarter with no large purchase to explain it. That usually means day-to-day spending is being funded by debt — the one situation where postponing the decision genuinely costs money.
In Ordiarion net worth is calculated from your accounts, loans and the other modules, and every measurement stays in the history — so the chart described above builds itself, without a separate spreadsheet.