How do we define financial success? A high salary or huge bank balance. A high salary or huge bank balance won’t make you rich. Finally, Amount left with you after paying off your debt is an important deciding factor for financial success. To know this you need to calculate your Networth.
Networth helps us to know how much we have in case if we sell all our assets and pay off all the liabilities. Networth provides a snapshot of financial position at any given point in time. If we know our net worth today, it will help us to know are we on track or off track of achieving our financial goals. It will help us to know end result of income earned and money spent till now. Networth helps us to evaluate our financial health and the true picture of our financial life. We can view Networth as a financial report card to keep a track of our financial life and take corrective action required in case we are off track.
Let’s understand how to calculate net worth
The first step to calculate Net worth is to list down all the assets we own. This may include:
- Bank, Cash, and Liquid Mutual Funds balance – It includes cash in hand, bank balance, short term FD (less than 90 days), and liquid mutual funds scheme. All the assets are very liquid assets.
- Financial Assets – This includes your investment in Equity shares, bonds, Non-convertible debenture, Company & Bank FD, MIS, NSC, KVP, PPF, etc. All are considered at their current value.
- Real Estate – Real estate includes the current market value of properties including residential houses, land, commercial properties, etc.
- Personal Valuable & Assets – Includes personal use assets like Motor Vehicle, Jewellery, Painting, and other valuable personal assets, etc.
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The next step after listing assets is to create a list of Liabilities which may include loans or debt payable to banks or money borrowed from others. This may include
1. Housing Loan – Balance outstanding in the loan to be repaid to the bank or lender
2. Car / Vehicle Loan – Balance liability payable to a bank
3. Personal Loan – It includes an Outstanding balance to be paid
4. Consumer Durable Loans – It includes Outstanding balance loans on consumer durable like laptops, TV, etc.
5. Credit Card Outstanding – Outstanding balance on your credit card.
6. Other Loan – It includes balance on other types of loans like mortgage loan, loan on jewelry or loan from friends/relatives
We can calculate Networth by subtracting Liabilities from Assets or as per given formula
There are three possible outcome:
- Negative net worth means you have fewer assets and more liabilities or in other words, you owe more than you own.
- Positive net worth means you have more assets and fewer liabilities or in other words, you own more than you owe.
- Your Networth is Zero when your assets equal Liabilities
Ideally at any point of time in your life your networth should be positive. But due to possible trade off between needs and wants it may happen in the initial years of our career i.e. between 20’s and 30’s we may have negative networth. But our aim should be to create positive networth as we get closure to retirement i.e. in 50’s and it should keep increasing.
One of the important Role of financial planning is to help us keep a track of networth and take right financial decision. Our action should help us to increase networth instead of keeping constant or decreasing it. Decision taken in isolation like investment or savings without preparing or following financial plan could have negative impact on networth.
To conclude, networth helps us to know where we stand financially. This will help us to take right financial decision and we are better prepared to achieve our financial goals. Keep a track of Networth and be financially healthy.
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