The net worth of any individual is all the assets minus all the liabilities. Net worth is calculated both for individuals and corporate.
Planning for your financial future requires knowing where you are financial.
Net worth is a personal finance tool that can help you in determining and assessing your current financial situation.
Net worth can show your real financial situation.
Why it is important to calculate net worth?
The net worth represents the real worth of yourself at a certain time. It can help you identify how much assets and liabilities you have. It is a tool to determine where are you now.
Net worth in financial statements comes under the balance sheet. To find the net worth of individuals you can call it a personal balance sheet.
The balance sheet consists of three-element
Asset = Liabilities + Net Worth
Formula to calculate Net worth.
Formula to calculate net worth is very simple.
Net worth = Asset – Liabilities
To calculate Net Worth you have to write down all the assets you have and all the liabilities you have. And then subtract both assets and liabilities.
Steps on how to calculate Net worth
Step 1: Calculate Asset
An asset is something you have that can be converted into cash if you sell them. In the personal net worth calculation, the asset is divided into three categories.
1. Monetary asset
The monetary asset is asset or money you have in cash or in saving bank account. The monetary asset is most liquid asset you have.
1. Cash in hand
2. Money in the bank account
3. The cash you owe to your friends
2 Tangible asset
A tangible asset is something you have that you can touch. It can be your house, car, etc.
While calculating the price of tangible assets, write down its current market value. The market value of any product is the value on which you can sell your product today.
The drawback of a tangible asset is that it depreciates in value over time.
List of tangible assets you can have
2 Vehicle (Car, Bike, bicycle, etc.)
3 Electronic items (Laptop, mobile, Tv, etc.)
4 Anything you have that you think have some value in it can be considered a tangible asset
3 Investments assets
Investment asset is something that you have, that can grow in value. It can be real estate properties, stocks, bonds, mutual funds, etc.
Investments asset is the best type of asset you can have. And you should always try to increase your investment asset. It is very important for your financial future.
Your investment assets help you build wealth.
While calculating your investment assets write the current value of your investments.
Example: Suppose you have invested ₹10,000 in stocks, and at the time of calculation your current investment is ₹12,000. Then in the calculation, you will write ₹12,000 because if you sell your investment today you will get ₹12,000 in hand.
List of investment assets you can have:
1. Fix deposit
2. Retirement account
4. PPF/provident fund
5. Real Estate Properties( Land/ Apartment )
7. Mutual funds
Step 2: Calculate liabilities
Liabilities is something you owe to the bank or creditors. Liabilities are anything that costs you money.
You can divide liabilities into two categories
1. Current bills
Current bills are something you owe for a short period of time. Less than a month or years.
It can be anything like:
1. The utility bills that you haven’t paid yet (unpaid bills)
2. Credit card bills
3. The money you owe to Friends/ Family
2 Long term debt
Long term loans can be your mortgage, car loan, personal loan, etc. These long term liabilities you owe with the bank. On these loans, you have to pay interest.
While calculating long term debt only write down the amount you left to pay, not your total debt. Because of the debt you have paid, no more debt for you.
Example: Suppose you took a home loan of 60 lakh from a bank, and with interest, you only left 40 lakh to pay. You 40 lakh is only will be considered as liabilities in the calculation.
These are some long-term debt you can have;
1. Home loan
2. Car loan
3. Student loan
4. Personal loan
Step 3: Calculate Net Worth
Now in the final step subtract total assets from total liabilities. You can get the value of your net worth.
Net Worth= Asset – liabilities
Interpretation of value of net worth
Vale of net worth can be negative or positive. It is ok to have negative net Worth for some point of life, but you should always work to increase your net worth.
When you can have a negative net worth
1 you just passing out of college with college debt
2 you have taken Home loan
How you can increase your net worth
1 Avoid taking debt
You can see that your Net Worth can reduce by liabilities. To decrease your liabilities, it can increase your net worth.
The best way to reduce debt is to avoid buying things on credit. Avoid using a credit card.
2 Increase your investments
Second step to increase your net worth is to increase your asset. Your asset can increase by increasing your investments.
Start investing your money. Whatever money you have left after you necessary expanses invest that money.
You can invest your money in different places.
Net worth can help you determine where you are in terms of finances. Make it a habit to determine your Net Worth regularly. You can calculate your net worth twice a year.
Whenever we talk about the rich we talk about their net worth, not their annual income. If your goal is to be rich and financially free then it is important to know your net worth and work to increase your net worth.