Net worth is the amount by which assets exceed liabilities. It can be used to determine the financial worth of an individual or a business. Simply put, it means if you were put on sale, how much you would be worth in rupee terms. Finding out your Net worth is the first step to your future financial goals’ journey. Before you can reach a financial goal, you need to know where you currently stand.
Net worth is not only that starting step that directs you to set a financial plan to reach your goals, but helps you to protect your assets via insurance coverage by determining the worth of your assets.
How to calculate your net worth -
Formula: Net Worth = Total of all your assets – Total of all your liabilities
· List down all your assets. This should include bank balances, bonds, Equity investments, MF investments, property, PPF/EPF etc. Make a conservative estimate of the assets’ value.
· List down your liabilities. This includes all balance left in all loans like Home loans, credit card loans, personal loans, outstanding premiums etc.
· Find the difference. The difference is your net worth. At the start of your career you might have a negative net worth due to education loans or any other outstanding loan. This is normal, but take steps to ensure that you aim towards reaching a positive net worth.
Net Worth – Thumb Rule
There is also a thumb rule for how much should your minimum net worth be
Thumb rule: Ideal Net Worth = (Your Age x Gross Annual Income from all sources except inheritances)/10*;
Example: If you're 30 and earn Rs 10 lakhs a year, ideally you should have a net worth equal to or more than Rs 30 lakhs.
Why is net worth important?
Net worth is a snapshot of everything you own and everything you owe. It is important to know your net worth as you are aware of your financial health. Net worth should be calculated at least once a year so that you know the trend your finances are following.
How to increase your net worth?
· Reduce your Debts – You should pay off your debts as and when you can and avoid taking loans for consumption and personal loans.
· Make smart investments – Asset allocation is very important. It is not a smart idea to leave your money lying idle in the bank. Invest in a variety of assets like Equity Funds, Debt etc. so that your asset size grows.
· Reduce Expenses and Increase Savings – Keep a check on your expenses. You can list your daily expenses in various apps to start with.
*Source - The Millionaire next door
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