In simple terms, your Net Worth is an assessment of your financial health. It is the most important number that gives you a picture of your current financial situation. In other words, your Net Worth is the difference between what you own and what you owe.
Positive net worth is the difference between your assets (everything you own, convertible into cash) and your liabilities (your debts).
It is essential to take a realistic view of your assets (wealth). To do so, you need to understand the importance of net worth.
How to calculate your net worth?
The formula for calculating your net worth is simple.
Net Worth = Assets – Liabilities
- Liquidity: Cash on hand with all cash equivalents such as money market funds, certificates of deposit, treasury bills, etc.
- Investments: This category includes retirement investments such as employer plans, pension assets, and any other assets that may generate income in the future.
- Real estate: This includes the market value of your home as well as the value of any other property you own.
- Business assets or equity: If you are a business owner, the net worth of your business and all significant business assets will also be included in your net worth.
- Personal assets: These include cars, jewelry, furniture, and other personal items.
- Miscellaneous assets: any other valuable assets not included in any of the above categories such as personal loans and receivables, life insurance policies, etc.
- Mortgage: This is the mortgage on your home and a mortgage line of credit.
- Installment loans: these will include car loans, student loans, and any other loan agreement on your property.
- Credit cards: reflect revolving debt and must be accounted for when calculating net worth.
- Business Loans: For a businessperson, any outstanding loans for the purpose of conducting business are also considered personal liabilities and are included in the individual’s net worth assessment.
- Miscellaneous liabilities: includes other financial liabilities such as medical care loans, tax liabilities, etc.
Once you have listed your assets and liabilities, simply apply the formula given above to calculate your net worth
What are the benefits of tracking your net worth?
Although it is very important, most people don’t worry about knowing their net worth. However, it does reflect everything you earn and spend, as well as your efforts in managing your finances.
Let’s explore in detail why knowing your net worth is very important.
- Helps you calculate your wealth
Wealth is often defined in terms of income levels, which is only partially correct because it does not take into account your expenses and liabilities. Net worth is considered the most accurate method of assessing your current wealth and financial situation. It allows you to determine exactly what your credit balance is after payment of all your debts and invoices.
- Helps you track your financial progress.
Almost every financial decision you make is either to help you grow or to protect your financial situation. So how can you grow up without knowing how much progress you’ve made? Calculating your net worth allows you to closely monitor your financial situation and make better decisions. Net worth growth is an indication of your financial growth and can serve as a motivating factor towards achieving your financial goals.
Makes it easier to manage your finances.
Knowing your net worth allows you to manage your finances more effectively. It will help you put your income and expenses into perspective and determine what will go into savings and what needs to be invested to increase your income. It can also help you establish a strategy for paying off your debts so that your financial health does not suffer.
Allows you to build a more stable financial future.
Having control of your net worth can help you create a retirement plan that guarantees financial security in the future. Based on your financial plan, you can assess your current situation and make decisions to achieve your financial goals.