Your net worth is the total of your financial and non-financial assets, minus your total outstanding liabilities (mortgage, car loan, personal loan, home loan, business loan, credit card debt, etc.). In simpler words, it is the amount of money you would have, in cash, if you were to sell all your assets and pay off all your debts.
The net worth of an individual is the indicator of that person’s financial condition. Even though there is no predefined magical net worth number that you should be striving for, knowing how to calculate your net worth can help you keep track of your financial progress year by year...........
Calculating your net worth isn’t a difficult process; all you need to do is gather all the information regarding your assets and liabilities. Create a secure folder where you can keep all the information regarding your assets and liabilities which would be updated at least once every year.
Calculate your assets
The easiest way to get started is by calculating your largest assets first. These could include your house, your car, or any other major investment. If you are running a business, you could also include the market value of your business.
The next step would be to collect your latest statements for your more liquid assets. These assets would include your savings accounts, cash, fixed deposits, etc. Make a list of all your items that may be of value. These could include jewellery, watches, musical instruments, collections, antiques, heirlooms, etc.
Calculate your worth liabilities
Just like you did with the assets, calculate your biggest liabilities first. Start by calculating liabilities such as your mortgage, car loan, personal loan, or any other major debt that you may have taken. These could include any outstanding balance on your credit cards, remaining student loans, or any other debt that you need to pay off.
Do the math of worth
Simply subtract the total number of liabilities from the total number of assets to get your net worth. Don’t be discouraged if the number isn’t too high; even if it is negative, it doesn’t necessarily mean that you should be worried—especially when you’re just starting your career. Update your assets and liabilities in your folder at least once every year (preferably on the same date) and calculate your net worth. By comparing this net worth with the previous year’s net worth, you would be able to gauge your financial growth quite accurately.
Some things to consider
When you’re calculating your net worth, be as conservative as possible while estimating the value of your assets. If you have liquid savings, you should keep them in high-yield accounts. It would help you grow your wealth faster.
If you have several outstanding debts, work on paying them as quickly as possible. You can consider refinancing or consolidating
debts at a lower interest rate to speed up the process of paying off your debts. Take a hard look at your budget and reduce expenses wherever you can. The capital you save can either go towards low-risk, moderate/high-yield investments or debt repayment. If you still have the capital to spare after that,
you should definitely create a corpus to take care of your financial needs post-retirement.