How to Create Wealth through Net Worth & Retirement Lazer Focus

In this article, we focus on breaking down net worth so that it answers the more common questions most of us have in life when thinking about net worth and financial independence. In this 7 minute read, you will have some of the following questions answered:

  1. What is your net worth really?
  2. How does net worth influence your life now and after retirement
  3. Building your net worth: investing versus getting rid of debt
  4. Living now versus living after retirement, which one do you choose?

1. What is your net worth?

Simply defined, your net worth can be stated as the amount of money you have (in whatever form) minus the amount of money you owe (in whatever form).

Knowing your net worth provides a lot of value in measuring your personal financial position in the long run. A Fincheck team member quoted it best:

“Understanding your net worth is basically knowing your true value in moola. Without it, you don’t know if you’re getting richer or poorer.”

Ultimately, your net worth shows your ability to create sources of income and how well you are able to steward (or manage) the money coming in to live the life you want to. 

If you would like a full breakdown of net worth, read this article.

You can use this easy calculation at home to see how well your true value in moola is doing:

  1. List all your assets i.e. “positive money”. These are items that result in positive cash flow.
  2. List all your liabilities i.e. “negative money”. These are items result in negative cash flow.

Example Case Study

  1. Your savings account, money sitting at home, valuable pieces of jewellery/art at home and any retirement plan you have available.
  2. Your outstanding debt that includes home loans, student loans, credit card debt, any money you owe to people.

Now you go ahead and calculate 1 – 2 = R…

If your Rand value is positive, you’re doing pretty well and can get it even better as you build towards your retirement! If the Rand value is negative, it means you need to get a solid plan in place to get rid of debt before you get any closer to retirement.

The following strategy is one suggested by many to build net worth:

  1. Get a small emergency fund in place
  2. Snowball your smaller and short term debts (i.e. start small and pay off until it creates a snowball effect)
  3. Focus on maxing out your tax-free savings like a TFSA and RA
  4. Eliminate long term debts (including vehicle finance agreements and home loans)
  5. Explore other investment opportunities

2. How does net worth influence living your life now and after retirement

It will be almost impossible to live a healthy financial life once you get to retirement if you still have debt at that age. Most people in South Africa have a bare minimum retirement plan in place that will not even closely match the same income and expenses they have now.

Your ideal plan is to tackle debt while you still have time. This means you can try different repayment plans and take calculated risks to increase your streams now so you are better able to pay off debt and build true wealth for your future!

How do you achieve this? Let’s take a look at when to invest and when to pay off debt.

3. Building your net worth: investing versus getting rid of debt

There are many ways to build your net worth which all depend on your risk appetite, skills, resources and desire to build a better financial future for you and your family. 

When it comes down to it though, there are two outcomes. You are either investing in ways to create more money, or incurring debt to fuel your current lifestyle. The first change towards building net worth should be to create more money or to reduce your total debt. Ideally, both at the same time!

Unfortunately, this is easier said than done as there are many strategies that will either guide you to 1) invest now and pay off the debt later, or 2) pay your debt off first and then start investing. Then, of course, there are the combo strategies that try to achieve both outcomes using things like interest, time, investment vehicles and budgeting in unique ways.

We have found the following article by Take Back Your Money blog, which gives a great insight into which approach can work for you: Saving Money versus Paying Back Debt.

We will say the following, however. There are some key considerations every person should keep in mind when they decide which strategy works best for them.

3 key considerations every person should keep in mind for building net worth

1. Emergency funds

An emergency fund is extremely important because it prevents you from falling into more debt. Many people argue that emergency fund deposits are better spent on reducing their current debt and saving on those interest payments. The reality is, most people simply don’t have the discipline to hack away at their debt and thus they use up those deposits by dipping into their credit card again (for example).

But, most people do have some discipline in putting money away in a place where it is less accessible (like a fixed deposit) but still available for emergency use. This is why committing to an emergency fund is an extremely effective way to boost your net worth gains.

Starter emergency fund tip

Focus on putting enough aside to cover basics needs which usually result in you using your credit card e.g. bigger household costs like broken appliances, vehicle maintenance, unexpected medical costs etc. 

Get rid of the thought that it must be a huge fund able to cover three to six months salary! This is something you can build towards over time, but making it your focus when you start out will discourage you from committing to your emergency fund.

2. Seizing an opportunity to get ahead

Sometimes you are uniquely positioned to seize an opportunity that will positively affect your net worth over the long run. This could be an offer to buy into a promising company, buying shares that are almost guaranteed to grow exponentially, or buying and selling products at a huge profit. 

The opportunity landscape can be endless. When you think you are uniquely positioned to seize an opportunity, you can take a calculated risk (after first getting some wise counsel hopefully) and invest in something despite your current strategy is to first pay off debt. 

3. Leverage “healthy” forms of debt

With a focus on helping people make better financial decisions, we are always careful to not endorse or to discourage debt. It’s about making a healthier decision.

If you are drowning in debt, you should not be applying for more debt. Read this case study for example. This is an unhealthy decision – thousands of South Africans are being hunted by loan sharks because of these decisions.

But, a healthy decision could be to make use of your disposable income to position you for growth. Getting a car through vehicle finance, for example, could be a healthy decision if it better enables you to meet the requirements of your work-life balance. 

Another example is using your disposable income to start a real estate portfolio or to buy instead of renting. Usually, you will need a home loan for this and therefore many people consider it as a healthy form of debt. Especially because you can borrow money out of your mortgage at a much cheaper rate than other forms of personal finance.

Here are 3 quick tips for determining “healthy” forms of debt:

  1. The debt should ideally have a positive return over the long run. A car might be a liability on a balance sheet, but it usually enables people to get to work which brings household income.
  2. In the world of real estate, your mortgage or home loan repayment should not exceed what you paid in rent or what you earn from that property.
  3. When you use a credit card for purchases so you earn rewards with your bank, pay back the balance every month.

Managing the process: living now versus living after retirement

Ultimately, this is something every person or family needs to decide for themselves. Your net worth is something that influences how you live your life and your level of financial independence. Some people achieve “retirement” very early in life and others work until the day they take their last breath.

There are 2 extremes and then there can be a balance. 

The First Extreme: Living fully now without investing in your future will carry a certain amount of risk of living in poverty when you want to retire.

The Second Extreme: By only investing in your future and not living now will mean missing out on tons of life experiences on the way to your “secure” middle years. 

Some people prefer living in either of the two extremes. But, for many others, finding the right balance according to your priorities is the better route to take. It means you can apply either a steady or an aggressive financial independence strategy (like the FIRE model) to build your net worth while still enjoying prioritised life experiences now. 

There definitely are ways to enjoy life now and after retirement. But, it requires hard AND smart work that will almost certainly pay off in the long run. If you keep doing your best to make your personal finances work in your favour! Everyone’s timeline looks different, some people get their “financial break” in 5 years and others only after 15 years. 

The only words of wisdom we truly have here is to never compare your “behind-the-scenes” with someone else’s “highlight reel” and to get off your rusty-dusty to make your finances work towards building positive net worth. This can result in treasuring the moments you have with your kids now, and with your grandchildren in the future. 

To help you build your net worth and a better financial future, we have some awesome product features launching in the near future. Sign up as a MyFincheck user and be the first to know when we launch our net worth calculator!


Article at a glance

In this article, we focus on breaking down net worth so that it answers the more common questions most of us have in life when thinking about net worth and financial independence. In this 7 minute read, you will have some of the following questions answered: What is your net worth really? How does net […]

Written by Ean

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