📊 Liabilities and What Net Worth Reveals

What to Include as Liabilities

Understanding Negative Net Worth

Negative net worth means you owe more than you own. This is common and not necessarily bad - context matters.

When Negative Net Worth Is Normal:

• Young adults: Student loans plus minimal savings = negative net worth temporarily
• New homeowners: Large mortgage exceeds home equity initially
• Recent major purchases: Financed vehicle or education temporarily creates negative position

When Negative Net Worth Is Concerning:

• Negative and worsening over time (debt growing faster than assets)
• Negative due to high-interest consumer debt rather than assets like property
• Negative in later career when should be accumulating wealth
• Negative without corresponding assets (debt spent, nothing to show for it)

What Net Worth Reveals

Overall Financial Position:

Net worth summarizes financial position in single number. Positive net worth means assets exceed debts. Higher net worth indicates more accumulated wealth. But absolute number less important than trend and context.

Progress Over Time:

Track net worth annually or quarterly. Is it increasing? Healthy sign - accumulating wealth. Decreasing? Warning signal - investigate why. Flat? May need to increase savings or reduce debt more aggressively.

Asset vs Debt Balance:

Two people with same net worth can have very different financial situations. One might have substantial assets and debts. Other might have few assets and few debts. The structure matters for risk and flexibility.

📈 Tracking and Improving Net Worth

How to Track Net Worth Over Time

Establish Baseline:

Calculate net worth now. This becomes your starting point for measuring progress.

Set Review Schedule:

• Annual review: Sufficient for most people, shows long-term trend
• Quarterly review: If actively working on financial goals
• Monthly review: Usually too frequent, normal fluctuations create noise

Document Consistently:

Use same methodology each time. Value assets consistently. Include/exclude same items. Consistent measurement makes trends meaningful.

How Net Worth Increases

Common Net Worth Mistakes

Overvaluing Assets:

Using purchase price instead of current market value. Vehicles depreciate - worth less than paid. Listing items at sentimental value rather than actual sale value. Be realistic about what assets would actually fetch if sold.

Excluding Debts:

Only counting "bad" debts and excluding mortgage because it's "good debt." Include all liabilities regardless of type. Net worth calculation requires honesty about total obligations.

Obsessing Over Short-Term Fluctuations:

Property values fluctuate. Investment values move up and down. Month-to-month changes often meaningless noise. Focus on long-term trend over years, not month-to-month volatility.

🎯 Net Worth in Context

Net Worth vs Income

High income doesn't guarantee high net worth. Someone earning well but spending everything has low net worth. Someone earning modestly but saving diligently accumulates wealth. Net worth reflects accumulated decisions over time, not current earning power.

Net Worth vs Cashflow

Can have high net worth but poor cashflow (property rich, cash poor). Can have good cashflow but low net worth (high income, high spending, little accumulated). Both metrics matter - net worth shows accumulated position, cashflow shows current financial functionality.

Life Stage Expectations

Twenties:

Often negative due to student loans, minimal savings. Normal and acceptable. Focus on establishing income, controlling debt, beginning savings habit.

Thirties:

Transition from negative to positive. Mortgage may create temporary negative, but equity building. KiwiSaver accumulating. Net worth typically growing.

Forties and Fifties:

Should be solidly positive and growing. Peak earning years enable aggressive wealth accumulation. Mortgage reducing, retirement savings compounding.

Sixties Plus:

Retirement approaching or begun. Net worth should peak. Drawing down assets to fund retirement. Decline is planned and acceptable if supporting desired lifestyle.

Using Net Worth for Goal Setting

Set Target Growth Rate:

Aim to increase net worth by specific amount or percentage annually. Creates concrete goal and measures progress. Typical healthy growth: ten to twenty percent annually through thirties to fifties.

Milestone Targets:

Set net worth milestones. First positive net worth. First major threshold. Retirement target. Achieving milestones provides motivation and confirms progress toward long-term goals.

Final insight: Net worth is simple snapshot of financial position but powerful tool for understanding wealth accumulation over time. Calculate it honestly, track it consistently, focus on long-term trend not short-term fluctuations. Increasing net worth over time demonstrates financial progress regardless of absolute number. The goal isn't competing with others but building wealth steadily to support your life goals and eventual retirement.