What is your Net Position?
What does Net Position mean, how do you calculate your Net Position and why it is more important to track than Net Worth.
What is Net Position
You’ve probably heard of the term “Net Worth”. The formula for working out your Net Worth is:
Net Worth = ALL assets - ALL debt
It’s a simple formula and many people gauge their financial success by their Net Worth. It is ONE measure of a person’s financial success however the problem with net worth is that it doesn’t necessarily provide an income for you.
You see, for a lot of people, their net worth is tied up in the value of their home. Take this example below:
Assets
Liabilities
This client has a total of $1,993,700 of assets and a total of $468,644 in debt. If the client sold all their assets and paid off all of their debt, they would have $1,525,000 left in their Bank account.
This is their net worth and in itself is great HOWEVER if the client were to do this, they would no longer have a home to live in or a nice car to drive around in.
You see, the majority of this client’s assets are tied up in the value of their home which means unless they were willing to sell their home in retirement, then their home is not going to provide an income for them in retirement.
Of course, there are caveats to this, such as downsizing or taking on boarders however neither of these are ideal options unless you were wanting to do so. The reality is, most Kiwis end up in a financial situation where they are being forced to downsize out of necessity rather than choice.
So what’s the solution? Tracking your NET POSITION.
The formula for tracking your net position is:
Net Position = INVESTMENT assets - ALL debt
Using that same example above, if the client liquidated all their investment assets $711,700 and paid off all of their debt $468,644, their net position would be $243,056.
In this example, it’s a much smaller number because it excludes the home value, however it’s this net position number that is actually going to provide an income for the client in retirement while still having a roof over their head.
By tracking a client's net position, we’re making sure that they're going to reach retirement with enough income producing assets to maintain their lifestyle heading into retirement (or even more if they have the resources to do so) regardless of whether they decide to stay in their forever home, forever. This way, if they did decide to downsize (or monetize their home in some other way), they’re doing so because they want to.
And that’s a better position to be in, we believe.
Don’t get caught out come retirement time because you’ve been tracking the wrong financial metrics. Your net position is a much more realistic gauge of your financial success when it comes to your retirement planning and by tracking this metric instead will give you options in retirement.