The NBA owners knew exactly what they were getting into. Ten years ago, the NBA season started about 4 months late.
Why? The owners went on strike. No games were played, which meant no paychecks for the players.
In the end, it was a very smart move by owners. They knew exactly what they wanted and how to get it.
The players union was trying to hide a giant secret. After making millions of dollars a year, some players had spent it all. They lived paycheck to paycheck just like most people today.
The owners were smart. They knew the longer they held out, the easier negotiations would get.
It took only a few months for the players union to cave in to the demands of the owners.
Switching To A Net Worth Mindset
It’s not what you make it’s what you keep. If you make a million and spend a million in a month, you might have had a lot of fun, but your financial situation doesn’t improve.
Luckily, there is a pretty simple calculation to see how much you have kept, called your net worth.
The most standard way of calculating your net worth is:
Net Worth = Assets – Liabilities
Net Worth vs. Net Wealth
Your net worth is a fairly simple equation. However, for a better snapshot of your personal finances, take it one step farther by dividing your net worth by your average daily expenditures. Let’s call this your net wealth.
Net Wealth = (Assets – Liabilities) / (average monthly expenses/30)
Your net wealth is the best way to get a clear picture of your personal finances. The NBA players above, might of had an above average net worth for sometime, but they had a below average net wealth.
Calculating Your Net Worth and Net Wealth
There are plenty of ways to automate calculation of your net worth. A site like Mint can do this calculation fairly quickly.
If you have a problem with putting all your financial information into one site, you can use a spreadsheet. Google Docs works well but if you want to go offline you can use Open Office.
The first step is to add up your assets. (If you’re not signed up for online access at your banks, now is the time)
Your assets column should contain:
Assets
- Savings
- Money Market Funds
- Non-Retirement Investments
- Cars
- IRA
- 401K
- Real Estate
- Anything else that has value and are willing to sell
Note: I don’t find it very important to include every asset. You can easily go overboard and include your furniture, appliances, jewelry, clothes, collections…etc to your assets column. Include only those things that you’re willing to sell. For example, I could easily include my wedding ring and Michael Jordan card collection but they have no value since I have no plan to sell them
Next, add up your liabilities:
Liabilities
- Credit Cards
- Car Loans
- Student Loans
- Home Loans
- Any other debts
Now take your assets minus liabilities. You have arrived at your net worth. You’re not done yet.
On the bottom of the page, there are four more important rows:
- Percent change = ((Old-New)/Old) x 100
- Average monthly expenses
- Average daily expenses = Average monthly expenses / 30
- Net Wealth = Net Worth/Average Daily Expenses
The Benefits Of A Net Wealth Mindset
One of my favorite personal finance authors is none other than Benjamin Franklin. One quote of his explains the fundamentals of personal finance in only a few words, “”There are two ways to increase your wealth. Increase your means or decrease your wants. The best is to do both at the same time.”
It’s easy to get yourself cut up in the amount of information available on personal finance. You can read for hours and hours and still be confused about what action to take next.
I find it easier just to grasp principles. If you’re able to grasp the principles, personal finance is simple.
Having a net wealth mindset is one of the few principles to personal finance. If you were to calculate your net wealth each month, you know exactly where you’re at and a better idea of where you’re going.
{ 12 comments }
What a great opening. Too many of us rely on a month to month existence, even our government it seems. This economy is making people think more about the way they handle their money.
Your points are laid out nicely, just a great read. Thanks.
Great information – really enjoy reading your blog!
Interesting way to think about net worth / wealth. But question – is net wealth an established, defined way of looking at one’s own economy? I mean, it looks like from the equation it works fine so long as your assets outweigh your liabilities, but if you have greater liabilities, then it’s probably better just to say you have “0″ net wealth – otherwise you run into the problem of having “less negative” net wealth the greater your monthly expenses! Also, income is not taken into account in this equation (except in terms of assets), not sure if that poses a problem. Your thoughts?
@Mike – Thanks for the great comments.
I don’t see a problem to having a negative net wealth. You’re hiding reality if say anything else.
Income isn’t taken into account in your net worth either. It’s why, what’s you keep is more important then what you make.
Thanks for the reply RJ! Let me clarify though… with a “real” example – let’s say RJ has net WORTH of +50,000 (nice work!)… Mike unfortunately is socked with student loans giving him -50,000 net WORTH. They both have the same average daily expenditure, let’s say $100 per day. That gives a net WEALTH of +$500 for RJ, and (-)$500 for Mike. In order for RJ to increase his net wealth, he miraculously decreases his daily expenses to $50 giving him a net wealth of $1,000 … Mike sees this progress and follows suit… however, he somehow ends up with (-)$1,000 NET WEALTH … he’s now “worse” off than he started… so he INCREASES his daily expenses to $200 per day (living the high life) and presto, his net wealth has now “increased” to only (-)$250. . . .
Does this make sense? I like the equation logically when assets>liabilities, but when you get into “negative net wealth,” I really like it
The more I spend the richer I get? Help me if I’m missing something! Thanks again for the great site!
@Mike
I never thought of it that way. Thank you for clarifying.
You’re right. You can’t have a negative net wealth. It must be zero.
Thanks for the great article. For me, learning about finance can be intimidating, but your articles are always fun and easy to understand. Thanks again!
And it doesn’t matter what you spend if you live on a minimum wage income.
All the frugality in the world won’t make you wealthy.
I use a similar gauge except I divide by monthly expenses * 300. In this case, if you wealth > 1, you are financially independent. In terms of negative net wealth, the argument is similar to return on equity and return on asset calculations. If the denominator is small, the number can be severely inflated and if the numerator is negative, the number is meaningless. Ratios make it possible to compare things of different sizes but comparing someone with a negative networth and positive networth by simple ratios is like comparing apples and oranges.
.-= Early Retirement Extreme´s last blog ..How to win a sword fight =-.
Thanks so much for your post, “It’s not what you make it’s what you keep.” is so true. I really enjoyed your breakdown.. it’s given me renewed incentives to get my debt reduced!!
.-= Amy´s last blog ..The A to Z’s of the Wedding Cake Topper World =-.
Good luck Amy!
Wow this is definitely a mind blow. It’s not about how much money you have, but also about the cost of the things that you want. That’s what really defines your net worth… very interesting.
.-= Scott@Forex Robot´s last blog ..Compare Forex Trading Software =-.
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