Net worth is the balance of your assets and liabilities at any one point in time. Calculating your net worth takes into account all of your sources of wealth and subtracts the debts you may have. Regularly calculating your net worth helps you get a real time understanding of where you’re at with your finances and gain insight into ways to improve your life otherwise.
What does net worth mean?
At its most basic, net worth is your personal balance sheet, according to Mr. Yashpal Mehta, a CA by profession and Chairman, Samarth Community Council, “Simply put, it’s what you own minus what you owe,” Mr. Mehta says.
A positive net worth indicates your assets outweigh your liabilities, meaning you’re on a good track to building wealth. A negative net worth suggests there are parts of your financial life you need to pay attention to and improve. While some amount of debt is inevitable for most people, the higher your net worth, the more potential stability you have during times of economic upheaval including post retirement situations, and the better positioned you are to take advantage of any opportunities that come your way. In order to understand and calculate your net worth, you need to start by taking stock of all of your assets and liabilities.
What are assets and liabilities?
Assets are the financial instruments and things that you own,” says Mr. Mehta, Chairman of Samarth Community Council and a retd. Chartered Accountant. Some of the items that you can put in the “assets” column of your net worth calculation include:
- Cash in the bank, including savings accounts
- Investment account balances, including retirement account balances
- Your home equity
- Current price you could get from selling your car (if you have one)
- Valuable items you own, like collectibles, artwork or jewellery etc.
Liabilities represent your obligations, or what you owe to other people or companies in the market. While they may increase your purchasing power, they reduce your overall net worth because they represent money that isn’t truly yours. Liabilities may include:
- Any balance owed on personal loans
- Credit card balances
- The unpaid balance of your home mortgages
- Outstanding student loans or car loans or education loans
- Other obligations, such as alimony or child support etc
How to calculate net worth
Once you understand the value of your assets and liabilities, calculating your net worth is very straightforward. “To complete a net worth analysis, start with the total value of financial assets and subtract the total value of the financial liabilities,” Mr. Mehta says.
One challenge you may face is understanding the value of your assets. “For instance, your car was purchased for a certain amount, but it immediately lost value when you drove it off the dealer floor,” says Mr. Mehta. Your car’s resale value may actually be less than the amount you owe on it, turning what might seem like an asset into a liability
Similarly, asset values are often moving targets, as stock prices fluctuate daily and even things that might seem stable, like your home’s value, change based on current comparable market values.
Because most assets and liabilities are dynamic, not static, it’s important to keep in mind that any net worth calculation is simply a snapshot of your current situation. To understand your net worth more holistically, you should consider tracking it over time to see patterns and look for opportunities to grow your net worth more quickly
You can do this through a spreadsheet that you can track easily and update or through budgeting and net worth aggregation platforms provided by banks in India.
Remember your net worth isn’t a reflection of your personal value. Most people end up with a negative net worth at some point, and it doesn’t necessarily reflect poor financial habits. In life, you may have to take out student loans to cover your or your child’s education, for instance. And depending on the size of your loan, even if you’re making on-time payments, your net worth may be negative for some time. So instead of getting worried, please read on to know ways to raise your net worth.
How to raise your net worth?
Take the following steps to increase your net worth:
- Pay down debt
Tackling debt reduces your liabilities. The fewer obligations you have, the more your assets can be used for your financial benefit. Consider using the snowball or avalanche method to get ahead of your debt.
- Increase your income
If possible, boost your income by starting a side hustle. You may also research ways to start a passive income stream, like through dividend investing or buying and renting out real estate.
- Add more to your retirement and investment accounts
Steady contributions to tax-advantaged accounts can help you grow your wealth and increase your net worth over time. You can also add more to taxable investment accounts to boost your net worth while retaining access to liquidity.
While net worth is important, “don’t forget to consider what you value in your life,” Mr. Mehta points out. “Even if your net worth isn’t at the number you’d hoped for, consider other factors. Maybe you have a flexible job that allows you to be available to your family.” “Time, freedom, health and happiness are also currencies,” he continues. “They’re not factored into a traditional net worth analysis, but absolutely worth taking into account to live a full life.”