This is how you can calculate your net worth
In today’s fast-changing world, the measure of your financial health is not just your monthly earnings or savings in the bank. If you really want to know how financially strong you are, you have to understand your net worth. This is the figure that presents the real picture of your financial success.
Financial awareness in India today is at a new level. When the investment figure in mutual funds in the country has crossed the huge mark of ₹50 lakh crore and more than 10 crore common investors are active in the market, then it has become more important than ever to assess one’s net worth correctly. In simple words, net worth means that if you sell all your assets today and repay all your debts, then the amount left in your hand is your real capital i.e. net worth.
Net worth is your financial horoscope
Calculating your net worth is not rocket science, but it is very easy. For this you have to prepare a clear outline of your financial situation. Let us understand with a simple example how this mathematics works.
- First add up all your assets: Assets are anything you own that has a market value. This includes all your small and big things.
- Amount deposited in bank account: ₹100,000
- Fixed Deposit (FD): ₹1,00,000
- Investment in Stock Market (AMD): ₹1,00,000
- Your House (Current Market Value): ₹50,00,000
- Your Car (Current Market Value): ₹10,00,000
- Gold and silver jewellery: ₹2,00,000
- Your net worth is: ₹65 lakh
- Now list all your liabilities: Liabilities are all the debts you have to repay today or in the future.
- Home Loan Outstanding: ₹20,00,000
- Car Loan Outstanding: ₹3,00,000
- Credit card bill: ₹30,000
- Your total liabilities stood at: ₹23.3 lakh
- Now use the formula: The simple formula for net worth is: Net Assets Net Liabilities
- ₹65 lakh ₹23.3 lakh = ₹41.7 lakh
According to this calculation, your actual net worth is ₹41.7 lakh.
Why is it important to know your net worth?
- Accurate measurement of your progress: If your net worth is increasing year after year, it is a clear indication that your financial decisions, savings and investments are on the right track. It works like your personal balance sheet.
- Your safety net in case of emergencies: A positive and growing net worth assures that you are better prepared to face unexpected crises in life, such as a medical emergency or job loss.
- The path to retirement will be easy: Net worth plays an important role in retirement planning. Financial experts believe that if you create a net worth of ₹1 to ₹2 crore by the age of 60, you can comfortably withdraw up to ₹20,000 every month (as per the 4% withdrawal rule), which will act as your pension.
- Help in taking loan: When you apply for a big loan like a home loan, banks take into account your income as well as your net worth. A strong net worth enhances your credibility. For example, a person with a net worth of ₹50 lakh has a significantly higher chance of getting a home loan of ₹25 lakh.
How to become a smart manager of your wealth?
It is not enough to calculate your net worth just once and then forget about it. It is very important to track this regularly. Experts recommend that you should evaluate your net worth every six months. This is because the value of investments like stock market, gold and property keeps changing with time, due to which the figure of your wealth also fluctuates. You can track your assets and liabilities by creating a simple Excel sheet.