In this part of the series I would like to outline how to calculate your wealth. There are of course easier way to do it, but I think it worth doing more in detail so that you really know where you are.
The approach which suits to me best is “balance sheet”. I use my own version, extremely simplified, but suitable for anyone who wants to has great overview of her/his own financial situation.
How does balance sheet in general work? You have spreadsheet with two basic columns. First, called Assets, outlines row by row what all you do have – cash, securities, cars, flats, houses etc., you put there everything what you consider valuable.
To the second column, called liabilities, you write down what everything you owe – mortgages, loans and so on. The very last row of the second column is difference between assets and liabilities. It’s usually called “shareholders equity” in financial world, but we can call it “my net worth”. So if you deduct the liabilities from the assets you will get the right figure you want to know.
Let’s show it on the example – let’s say these are figures as of end of January 2019. First, let’s go with assets and then liabilites.
– House (worth eur 200k)
– Investment account – eur 100k
– Car – eur 20k
– Cash – eur 5k
Total: eur 325k
– Mortgage – outstanding payments are eur 120k
– Loan for the car – outstanding payments are eur 15k
– Credit card – eur 2k
Toal: eur 137k
So if you take 325 minus 137 you will get eur 138k – and that is exactly your net worth.
My balance sheet currently has around 40 different rows and it is my only tool for checking my financial situation. I do review once a month and see the trends in the chart. And what I do with this figure? My goal is to have approximatelly eur 1 mio in net worth which should generate 4% income in perpetuity (around eur 3,5k/month with not having mortgage).
I then take this figure, eur 138k and divide it by my goal. In this example it would be 0,138/1 = 13,8%.
Hope you find this useful, I will share my ratios within upcoming reviews! 🙂