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How to calculate your net worth?

October 06, 2009 16:37 IST
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How healthy are you? If you choose to answer this you would probably show me your recent monthly health check up reports. And I am sure most of you don't need a reason to have yourself completely tested on a regular basis! You just do it to ensure you stay fit!

But what if I ask you: how wealthy are you? You will probably show proofs of your assets like your home, car and jewels or cash at bank! But is that all? Are those assets your true worth, your net worth? Probably not! Then what is your net worth? How do you calculate it?

Is there a tool or method by which you could know where you stand financially? Let us find out.

What is net worth?

Put simply, net worth is the tool by which you could find out exactly your financial well being. And this is no rocket science but an important tool that everyone should adopt to find out if they are financially healthy or in a mess!

Before you look into this method called net worth, you should find out why you need to do this! Well, let me give you an example: You own an apartment. Everyone knows it is an asset. That's good! But what if you had taken a home loan to buy your apartment?

Can you still call it your asset? You shouldn't be till you complete your long cycle of EMIs, right?! It is like you are having a mortgage on your asset! In plain terms, there is also a liability tied to that asset that you think you own!

Net worth takes into account both your assets and liabilities to arrive at the true picture of your financial status. It is the sum of all your assets minus your liabilities.

Computing your net worth

As said, net worth is fairly simple to work out. A simple formula will give you the right result. Your net worth = sum of all your assets (-) sum of all your liabilities. Simple! But to use this formula you should first know what your assets and liabilities are. Here's a separate check list to identify your assets and liabilities.

What are your assets?

Suppose you own a house, then the market value of your house is taken as your asset value. Your asset can also include the market value of your land or farm house! Other assets could include the market value of your shares and mutual funds investments, the market value of your car and/or two wheelers that you own.

The value of your jewelry is also your asset and so is the cash in your bank account and at home. And if you have any fixed deposits, or a Public Provident Fund account, or Post Office Monthly Income Scheme, your National Savings Certificate, Kisan Vikas Patra and any other amount in other debt and investment schemes can be taken as your assets.

And don't forget the amount receivable that is the money that is due to you from your friends, colleagues or relatives! The market value of all these put together can be considered as your assets.

What is considered as a liability?

Now to the liability part! This could be pretty tricky to find out! Some of the top items are: the entire outstanding principle on the home loan you have taken is your liability. Also you can include any outstanding payments on your car or two wheeler loans or personal loan or any other loans that are outstanding.

Even the entire amount on your credit card payables and not just the minimum due should be considered as your liability. Also take into account any unpaid bills, and other payables. This will be your list of liabilities.

What does your net worth determine?

Now you are ready to use the simple formula to find out your net worth. Just add up the market values of all your assets and subtract the total liabilities from it. The figure that you arrive at is your net worth! In other words this figure is your real worth, your exact financial position!

The higher net worth you have, the wealthier you are! It is advisable to adopt this net worth formula once every six months as doing so will give you the exact picture of your financial status and the direction you should be heading towards, for a secured future.

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