Your personal networth is a piece of information in your overall financial planning that you should be aware of at the drop of a hat. Yet you find investors who either don’t understand the concept or if they do, they usually don’t calculate it.
You need to know how your net worth is calculated and tracked as this single piece of information tells you whether you are financially wealthy or not.
Let us find our how to calculate your personal net worth.
What is personal net worth ?
Simply put, this is a means of finding out how rich or poor you are. In it’s simplest terms, it is defined as the sum total of all your assets/holdings you have today minus all your liabilities. So it shows you what you actually and truly own today. It is important to note that when computing this, you need to take into account the current market value of the asset and not your purchase price of that asset.
Personal NetWorth = Total Assets – Total Liabilities
Why do you need to care about your liabilities ? That is because the price of the asset you hold is closely tied with any loan or mortgage you might possibly have on that asset.
To exemplify, if you have a flashy sedan that you like to show off to your friends, they would think that you are rich as you are driving around in an expensive piece of metal. But what if you had taken out a mortgage or a loan for this car ? A loan means you still need to pay the equated monthly installments (EMIs) to the lending institution in order to own the car.
In that sense, the car actually does not belong to you but to the lender. It cannot be considered an asset yet.
So it is important to understand that you need to subtract any liability that an asset may have from the current market value of the asset to figure out it’s individual financial standing.
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What are assets ?
Assets are entities that you possess and own. The sum total of the current market value of all the assets you own today is the total value of your assets. The assets could be any from the following :
Current value of your house/apartment/bungalow/land
Current value of any 2 or 4 wheeler
Present market value of shares and mutual funds
Value of jewelery
Value of all cash in your savings account and your wallet
Present value of PPF, fixed deposits, POMIS, NSC, KVP or any other fixed income instrument
Current corpus of all life insurance (non-term) policies
Amount you are expecting in the form of EPF, gratuity, superannuation from current/previous employers
Amount you are expecting from friends, IT department or anyone else
Current value of all electronic items, household items and furniture in your house
What are liabilities ?
Liabilities are money that you owe to someone else. It could be anything from the list below :
Outstanding principle on your home loan, car loan
Any other personal loans you have
Credit Card loans or dues
Other bills that you need to pay
Any amount of money you owe your friends or relatives
How to calculate it ?
You could use freely available spreadsheets to input all the values for your assets and liabilities. Or you could use TheWealthWisher’s Personal Net worth calculator to check your financial health.
There are freely available online money management tools to help you with this as well.
You need to analyze to see which asset is contributing most and check to see whether it is a very risky asset. Or are there too many assets of the same type.
For example, if you have too many real estate assets, a huge drop in real estate prices will erode the current market value of the houses which is turn will bring down your net worth. Obviously this ties in to intelligent asset allocation as well.
It must also be noted that movement of money from one asset into another will not change your net worth. So if you were to sell off your sedan for some amount of money and buy a smaller vehicle of the same money, it would remain same because you did not increase or decrease the current market value of your liabilities or your assets.
Whatever you do, this is an activity that you need to necessarily perform once a year on the minimum. You could also do it on a need only basis when there is a windfall of gains you receive. Since this gives a snapshot of your financial status, the more assets you have, the more richer you are. Your target should be to make it grow year on year.
When was the last time you calculated your net worth ?