What is your financial net worth? What is your financial net worth? What is your personal net worth?
Your financial net worth is the difference between the sum total of all your assets and liabilities.
Net worth = Total Assets – Total Liabilities
Arriving at your financial net worth is an important step by itself as it requires you to consolidate all the assets and liabilities that you may have and assign an accurate value to each of these. This helps you get a better understanding of everything you own and owe. In most cases, due to lack of information or time, we don’t know how many assets we have accumulated over time and what is it worth currently.
Once you have this number, it tells you where you stand currently. If you have a positive net worth (i.e more assets than your liabilities), it indicates that you are on your path to wealth creation. On the other hand, if you have a negative net worth (i.e you owe more than you own) it indicates you may have bitten more than you can chew. If most of your income is tied towards servicing your liabilities and paying EMIs, you may not have enough surplus to grow your wealth, forcing you to take on more debt in the future to meet non-negotiable goals. This may lead to further deterioration in the net worth, leading you into further debt.
How do you arrive at your net worth?
First, make a list of all your assets. Assets are further divided into financial and non-financial assets. Financial assets are non-tangible assets, those that can be tracked and monitored., for eg: fixed deposits, mutual funds, provident funds etc.
Non-financial assets are tangible assets like gold, real estate etc.
Then make a list of all the liabilities including personal loans, vehicle loans, credit card loans etc.
Why is one’s financial net worth important?
It gives you a very broad picture of your financial journey until now.
- Positive net worth is a good reassurance that you are on the right track to financial freedom. However, ensuring that the net worth continues to grow is equally important.
- Negative net worth is a red flag indicating that it is time you pull up your socks and start prioritizing your needs and goals.
Financial net worth will fluctuate over time with changes in assets, liabilities and their values. Just like you have an annual medical check-up to ensure that your health is in good condition, it is very important to keep tabs on your financial net worth to ensure your finances are in good shape. Keeping a close tab on this number will take you a long way in ensuring your journey to financial freedom.
By Nandini Amogh
Wealth Advisor