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Brady, who previously worked at the Millennial-focused financial advisory firm Fox & Hare, who now runs financial literacy platform The Greenhouse, prefers the term “net worth” to the more traditional “net worth” because he doesn’t believe your overall financial position is a reflection of your worth as a person.

Either way, financial advisers say understanding how much money you’d have if you sold all your assets, minus your liabilities — and watching how that changes over time — is never a waste of time.

Tracking progress toward a goal can be the difference between achieving it or not, according to research published by the American Psychological Association in 2015. And as traditional markers of wealth, such as buying a home and paying it off, become more difficult and goals As alternatives such as achieving financial independence and early retirement gain traction, the ability to achieve your wealth goals will increasingly depend on your ability to maximize income, reduce expenses and – importantly – stay on track. good.

Monitoring your net worth and how it changes is one of the best ways to see if you’re succeeding, financial advisors say.

How to calculate your net worth

Shani Jayamanne, senior investment specialist at Morningstar, says the first step to calculating your net worth is to gather your bank statements, loan statements and any brokerage account values ​​for your stock investments.

You want to consider how much you have in savings, in your business, and in retirement — bearing in mind that retirement isn’t something you can technically access until retirement.

If you have assets such as a wine collection, valuable art, or even just your home, it’s good to have as close an idea of ​​current values ​​as possible. Your car is also an asset, but your car loan – if you have one – is a liability.

When it comes to the value of your home, also consider what it would cost to sell it, Brady says. According to Westpac, to sell a $700,000 home, it will typically cost $22,000 or more, based on $2,500 in marketing, $17,500 for the agent, $1,000 for the conveyancing and $1,000 in commissions of creditors.

Then look at your debts. Think about your home loan but also include things like your car loan, HECS/HELP debt, credit card debt or Afterpay.

There are several online tools that can help you calculate this. Morningstar offers a net worth spreadsheet, while the government service Moneysmart offers a net worth calculator.

Once you’ve calculated everything, take a good look at whether you have liquid reserves or an emergency fund already established, or if you have enough money saved up to build one.

“A good cash reserve for self-insurance is about three to six months’ worth of expenses, but more if you’re self-employed,” says Jayamanne.

It’s vital to take a close look at your liabilities, says Brady. Good debt will be related to things like houses, where you can reasonably expect the asset to appreciate in value. But watch out for bad debts.

“If we see in that list of liabilities that there are debts against things that are not increasing in value – like credit cards and BNPL debt – I think that’s a red flag,” Brady says.

“It’s also an opportunity to say, ‘OK, I see I have debt here that’s not healthy and productive for my long-term financial strategy.'”

If you’re in a relationship, it’s a good idea to compile both a joint and an individual statement of net worth, Brady says. “What I often find is that people have personal goals they’re working towards and couple goals, so we want to know both stories and what the numbers tell us about how they’re doing.”

Now you have your number, look at your cash flow

Your net worth is a reflection of your overall financial position. But it makes no sense without understanding how it was formed and how to change it. That’s where cash flow comes in, says Jayamanne.

Simply put, your cash flow is how much money is coming in each week, fortnight or month, how much is going out and – critically – where it’s going.

To understand your cash flow, take your bank statements for at least the last three months – up to a year if you can – and go through them line by line. Don’t skip seemingly “one-time” payments like gifts or big expenses like bills. The Moneysmart budget planner can be useful to make sure you don’t miss anything.

If your overall cash flow is negative, that’s a clear red flag, Brady says, and a sign that you need to either increase your income or decrease your expenses, or both.

Even if you don’t have huge red flags, cash flow will help you understand how to reach your goals faster.

“I’m always afraid to talk about things like the price of coffee, but [failure to improve your financial position] it may be from a death by a thousand cuts,” says Brady.

“All these tiny, seemingly unimportant things like a daily coffee or $50 blown at brunch every weekend — if it happens regularly enough, you’ll soon be losing thousands of dollars a year.”

Likewise, however, your cash flow analysis shouldn’t lead you to cut every piece of external spending. For example, you might find that you pay for three streaming services, but only use one. Canceling the two overdraft accounts will probably net you enough to continue your coffee habit and free up some cash flow on the side.

Jayamanne says to also check your debt-to-income ratio when looking at your cash flow. That is, how much of your income is spent on debt. So if you have a monthly after-tax income of $10,000 and $5,000 of that goes toward mortgage repayments and down payments, you have a debt-to-income ratio of 50%.

“It varies, but your debt-to-income ratio should typically be somewhere between, conservatively, 25 percent to 36 percent,” says Jayamanne. But that also depends on your income level, she adds. If you have a large, regular income, you can probably exceed it without too much trouble.

If you have positive cash flow and a sustainable surplus—that is, a consistent amount that you invest in savings or remain in your checking account after accounting for bills and an emergency fund—that’s a sign that you may be able to be prepared to invest.

“The first thing you need is cash in your bank account, which is liquid,” says Jayamanne.

“The second thing is a goal you are investing for. If you’re investing for a vacation in a year, it’s possible to leave it in your savings account. But if you have a goal that’s 10 or 12 years in the future, there’s a high opportunity cost to not investing [in the sharemarket].”

Rinse, repeat and see how it changes

Cash flow is something you want to check on every month, says Jayamanne. The overall calculation of net worth may be performed less frequently, but should be performed every six to 12 months.

“Life goes up and down and sometimes there are times that are more expensive than others. But I’ve found that my clients really appreciate being accountable to their goals and to themselves,” says Brady.

“If people don’t have visibility, then they don’t recognize progress and they don’t recognize when things are stagnant or backwards.”