How to calculate your Net Worth

What does net worth mean?

Net worth in simple terms from a financial aspect means the amount by which your assets exceed your liabilities. In simpler terms it is the difference between what you own and what you owe. Which concludes that if you have assets outweighing your liabilities means you have a positive Net worth and conversely of the liabilities outweigh the assets means you have a negative Net worth.

Net worth is basically a snapshot of a financial situation or more over a period in which you will be able to see the end result about everything you have earned and everything you have spent up until right now. Calculating the net worth would therefore help in keeping you on track about your financial situation.

Calculating the Net Worth:

Net worth = Assets – Liabilities

In a broader terms,

• Assets = Fixed Assets which include both Tangible and intangible assets such as land, building, machinery or patents, licenses, goodwill etc.

Current Assets include inventories, receivables and cash etc.

• Liabilities = representing of debts such as mortgages, credit card debts, medical bills, student loans etc.

What does it mean?

The net worth can tell a many things about a person. If the net worth is negative means you owe more than you own and if the net worth is positive would mean that you own more than you owe. It is empirical that as you age your net worth would increase you would pay off the mortgages and the assets would increase like the house, car etc. At some point it may even fall if you tap into your savings etc. for retirement plans.

Since each person’s financial situation and goals are unique therefore it is difficult to establish a common or an ideal net worth that applies to everyone. Instead you will have to determine your net worth and work on it taking your own future plans into consideration. If you aren’t sure where to start then this formula can be of great help

Net Worth = [Your Age – 25] x [Gross Annual Income ÷ 5]

For example a 35 yr. old person with gross income of Rs.8,00,000 might aim for a net worth of Rs.16,00,000 (using the formula) therefore this doesn’t mean all 35 yr. olds should use the same formula, it would depend on your lifestyle, goals and income etc.

Why is your net worth important?

To make spending decisions:

The net worth would help you realise where your maximum spending decisions are and therefore accordingly one can alter their spending decisions on the basis of the priority levels and reduce unnecessary spending and debts.

Paying down the Debt:

Knowing the exact numbers of your assets and liabilities can help in paying down the debt easily. For eg. Earning 1% in deposit account as interest and paying of credit card payment at 12% interest, therefore to use the cash to pay off the credit card would be a better choice in long run. Therefore number crunching such things can be done with the help of knowing net worth and taking decisions based on it accordingly.

Saving and investing for future:

Your net worth figures can motivate you to save and invest money for better returns. If your net worth statement indicates that you are on track to meet your financial goals then it can encourage you to continue what you’re doing. Conversely if your net worth indicates room for improvement then it would help you remodel the investments and spending. It would provide a needed spark of motivation to take a more aggressive approach to saving and investing your money.

Conclusion:

Regardless of what your current financial situation is but knowing your net worth can help you plan your future endeavours and evaluate your current health. One would have a mindful of financial decisions prepared for both long term and short term financial goals.

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