- By Darren Smith
Who are they fooling when people only tell you one side of the story?
On a recent trip to New Zealand I got into a conversation with a family member about what individuals could do to gain greater confidence around their financial situation. It was a very broad conversation but one element of the discussion that really stood out to me was how little focus people place on net worth.
The majority of people I speak to know exactly what they are paid / what their salary income is, have a rough sense of what they think their house is worth and a rough idea of what is in their superannuation account. Of course these inputs, whilst important, are only one side of the equation. Yet, in my experience these are the ones people focus on. They refer to properties they own, their recent pay rises or the performance of their super. How many times have you heard someone quote that they have multiple investment properties? Or talk about the brand new car they recently purchased.
To truly achieve greater financial wellness and improvement it is equally important to understand the other side of the equation. This being, where does the money go that you earn and what is your net worth? In other words, let’s add up all our known assets and items of value, but then let’s also understand what debts or claims by others we have over those assets. The net position after adding up all the assets and then subtracting all the claims provide us with a point in time net worth. The movement in this number over time is what the focus should be.
Sadly the majority of people, particularly those that don’t benefit from the services of a financial coach, rarely pull all of this information together in one spot. The main time we do, is when we are seeking additional finance. This is when we are forced to face the reality of our financial situation. Without this check in and focusing on only one side of our financial situation, we can develop a false sense of security. This can then compound or lead to even more spending.
Perhaps if more people adopted a check in semi regularly, say every 2 years it may prevent some of the emotional purchases or over commitment that quite often happens (quite common at Christmas time when many load up the credit card to full capacity). Tracking and understanding growth in net worth over time can be a real motivator to stay on course.
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