So you’ve committed to getting your finances under control this month of June. Maybe it was even your 2020 resolution. Although the year has not gone at all according to plan, it is possible to see the slowdown from the coronavirus as the forced reset you’ve been needing for self-care and improved financial health practices. The first pillar of financial health I recommended last week was the discipline of tracking one’s income and expenses. This week, we look into understanding your Net Worth. Did you know that everyone, including you and I has a Net Worth? It is not just a concept that’s reserved for public figures. In this article, we will dive in to why it matters to you and how it dramatically transforms your financial mindset, motivation, and actions.
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First, let’s define basic Net Worth. For the sake of simplicity, let us look at your Net Worth at the end of this year. My preference has always been to use a mathematical equation to explain this concept.
+ 2020 Income [Passive and active income]
+ Assets [Cash in the bank, mutual funds, other currencies]
– 2020 Expenses [Your spending, bills, insurance]
– Debt Liabilities [Short and long term debt]
—————————————————-
= Your 2020 Net Worth
So, to have a positive Net Worth, your income and assets must surpass your expenses and liabilities. A wealthy person, by definition, is someone with a relatively large Net Worth.
How does this understanding of Net Worth affect your financial mindset? Last week when I challenged you to track your expenses, I was setting you up to master one of the quickest ways to increase your Net Worth by reducing the value of the minuses in your equation. Tracking expenses has proven to dramatically reduce and even eliminate some entirely.
Once expenses are mastered, the next and more difficult step is to increase your income. Your active income is what you earn from your work while passive income is what your money does when it works. The first one is straightforward – you increase your salary, get a better-paying job and boom, you’ve increased your active income. Passive income requires a bit more set up. One of the simplest ways to set this up is to at least hold as much cash as you can in money market funds and treasury bills if you are not planning to use the money for three months or more. Other sources of passive income include stock dividends, rental income, royalties from creative work, to name a few.
Owning assets can be a two-for-one special. First, the value of the asset goes into your Net Worth, but if it’s an active asset, then it’s also likely earning you income. For example, owning property that you’ve rented out gives you the value of the property as well as its rental income. Another example of an active asset is owning a company that is growing in value and pays you a salary. As an owner in the company, your Net Worth grows as the company grows and becomes more valuable and at the same time, you’re earning wages. Two birds, one stone. Simply owning a piece of the company by being a part investor or owning employee equity is another way to enjoy this two-for-one benefit. If you haven’t already, make sure that your contributions at work are valued enough that you are offered a seat at the equity table. The sooner, the better.
Unless you’re planning to hold them for 10 years or more, the value of assets such as land can or stocks can fluctuate in the short term, but usually rise over the long term. It is much more manageable – and expensive – to own an active, income-generating asset.
Hopefully you now see how understanding the components of the Net Worth can affect your financial motivation. Set yourself up for passive income and asset ownership. At the very least, put your excess cash – if any – to work in a mutual fund. You can start with as low as NGN2,000. If you’re an employee at a place that offers employee stock, earn that stock by being excellent at your job and bringing it to their attention in your meetings and performance reviews. Not only will you command a higher salary, you will also open the conversation for equity. A crisis – global pandemic? – is an especially effective time to showcase your value to a company. You can shine in your personal finances and professional life. I fully expect it.
ABOUT THE COLUMN
Every Monday, JR discusses topics focused on career and money management, seeking to highlight the lessons being learned by young professionals navigating similar paths. If you would like to submit a topic or question, please send a DM to his social media handles – jrkanu on Instagram or email [email protected]
ABOUT THE AUTHOR
JR Kanu is the creator of the app, REACH: Expense & Money Manager – www.reach.africa. This app has helped thousands of young people across Africa to better understand and manage their money. He is also the author of the book, Money Brain: Career & Money Management in Your 20s and 30s – moneybrain.reach.africa. He is a builder of African businesses, lover of African art, an avid reader, writer, and huge advocate of the cities of Jos and Lagos.
