As people’s lives become more complex, tracking different aspects of financial well-being is important. Net worth is one such metric that gives you a clear picture of your financial health. To put it simply, it is the value of everything you own minus everything you owe.
It is a single figure that represents your current financial standing and helps you make major life decisions, such as whether to buy a house, finance a car, or how much to save for retirement.
Thus, it is advisable to calculate your net worth at least twice a year to make proper financial planning, saving, and investing strategies to develop a road map for financial success.
What is net worth? Understanding assets and liabilities
Net worth is an estimate of the combined value of all the assets you own, minus any debts and other liabilities you may have. It tells you how much money you would have if you sold all your assets and paid off all your liabilities.
Your assets include anything you own and can use to generate income or create wealth. They can be tangible, like your home or car, or intangible, like your mutual fund investments or retirement savings. When calculating your net worth, you will add together all of these value sources.
Your debts and liabilities are anything that you owe. They include money you borrowed from lenders, such as banks or family, and any outstanding loans, bills, or payments.
How to calculate net worth?
Basically, the formula to calculate your net worth is:
Assets – liabilities = Net worth
- Make a list of your assets
- List down all your debts and liabilities
- Input your assets and liabilities in the net worth calculator offered by any reputed website. The calculator will subtract your total liabilities from your total assets. The resulting number is your net worth.
Let’s understand it with an example:
Car: Rs 8,00,000
Savings: Rs 10,00,000
House: Rs 1,00,00,000
Personal Loan: Rs 2,00,000
Assets – liabilities = Net worth
8,00,000 + 10,00,000 + 1,00,00,000 – 2,00,000 = 1,16,00,000
If your net worth is positive, it means your assets are worth more than your debts and liabilities. A negative net worth indicates that you owe more than your assets are worth. And if your net worth is zero, it means your assets and liabilities are equal in value.
What if your net worth is negative?
Negative net worth can be the result of poor financial decisions or a decrease in the value of your home or other assets. Since negative net worth is not ideal, it is important to take steps to improve your financial situation.
- Cut back on unnecessary expenses and redirect that money towards debt repayment
- Start building your savings so you can improve your net worth over time
- Try to increase your income by focusing on building an investment portfolio that includes stocks, mutual fund investments, etc
- Diversify your portfolio and invest in assets such as property or gold
Knowing your net worth can be immensely helpful in making major financial decisions and tracking your progress over time. However, it is important to note that your net worth can fluctuate over time, depending on changes in the value of your assets and/or liabilities. A net worth calculator can simplify the calculation process by allowing you to input your current financial information and track changes over time.