written by KCLau @ KCLau’s Money Tips
This article alerts you to plot your net worth chart. You’ll learn how the charts are differentiated with different level of financial intelligence.
I actually planned to write a continuous series of posts with many charts illustration, showing you a clear pictures of net worth and cash flows. But my newborn son is taking up too much of my time and it seems impossible to complete the whole series within this week. I would have to stretch the time frame and hopefully can get it all written and posted in 2 weeks time.
Before this, we had learned about hacking cash flow and net worth chart, and also recently about the movement trend of our income and expenses level. in this post, we will study the trend of net worth over time.
Definition of net worth is assets minus liabilities. More accurately, it should be defined as total assets less total liabilities.
Net Worth = Total Assets – Total Liabilities
In this case, assets simple include all your economic resources, such as fixed assets (land, vehicles, house) and current assets (cash, money owed, stock, unit trust, etc)
Liability is anything that is owed to someone else, including your mortgage, car loan, credit card debt etc.
Plot Net Worth Chart versus Age
Net worth of a person is the value of his possession in monetary term. You can say that a wealthier person has a higher net worth. When we plot the net worth of a person over his age, we will instantly know how the person actually manages his money. The worst group is the financial idiots. At the other end is the financial geniuses. Most of us are somewhere in between.
Figure 1: Net Worth Chart of a financial idiot.
This chart shows an idiot digging a never ending debt hole. Until the day he is too broke even to declare bankruptcy, he will be buried in the deep pile of debt shit. There is no other way to help this guy unless he is willing to delay gratification, cut a lot of expenses, and work hard to save!
In financial planning, if you are educated enough and have the discipline to save, you will get the chart shown in Figure 2.
Figure 2: Net Worth Chart of a financially well planned person.
This is a typical chart of a graduate, who took up study loan to obtain his tertiary education certificate. That’s why you will see the line chart drop to the negative part. After he graduated, he knows that he is in debt. He got a job and moved up the corporate ladder. Meanwhile, by spending less that he earns, he’s able to settle the study loan, and build up some assets. You will see his net worth goes up and finally stopped at the retirement age. After he retired, there is no more active income generated and he started to spend his retirement fund. The fund might be just enough for him to spend until the day he rests in peace.
This is not too bad right? In fact, there is a study that shows that only 5 out 100 fresh graduate could successfully achieve the net worth trend shown in Figure 1. These persons are said to have achieve financial independence. They don’t need monetary sponsorship from family members
nor the public. These are the financially educated group.
Financial genius is someone who is really good with handling money. It doesn’t’ require a Ph.D in Maths or Economy to pull off something shown in Figure 3. What he needs to know is some simple arithmetical operations. He definitely knows that to have a positive net worth, assets have to be greater than liabilities at all time. I am sure that he also knows that savings is equal to income minus expenses.
Figure 3: Net Worth Chart of a financial genius.
I think those financial idiots know these simple principles too. The only difference is that the financial geniuses know that wealth and money is unlimited, but time is limited and scarce. Time ends at our last breath.
Decide Your Own Chart
Let’s do a simple exercise. This exercise might change your life.
1. Draft the shape of your net worth chart.
Is it a roller coaster type ( up and down and up and down and spiral)?
Does it look like a mountain, or a mix of several small hills and a high mountain?
Do you want an exponential graph?
2. Plot the history of your net worth.
Find out what is your current net worth, and trace it back a month ago, a year ago etc until the day you are born.
3. Then decide what is your next point in the graph.
Is your net worth growing steadily, or exponentially? It is all up to your own decision.
Are you a financial disciplined, a financial idiot, or a financial genius?