We are sure you have heard of the term ‘net worth’ at least once, especially when Forbes magazine announces their Rich List disclosing net worth of the world’s billionaires
The interesting thing is, regular people like you and I have net worth too! And you should know your net worth as it’s a snapshot of your financial health and an important part of a sound retirement plan.
How do you calculate your net worth?
The simplest way to describe net worth is the difference between what you own and what you owe - your assets minus your debts.
Net Worth = Assets – Debts
To do this, you will need to list down your total assets value which include:
- The amount your checking and savings accounts
- The amount in your brokerage and retirement accounts
- The market value of your home
- The estimated value of the items in your home (resellable)
- The value of your car
- Cash value life insurance
- Investments (stocks, bonds, unit trust)
- Rental income after deducting property loan and costs
Then, you will also need to list down your total debts including:
- Home loans, such as a mortgage, home equity loan or line of credit
- Auto loan or lease
- Credit cards
- Student loans
- Other loans, such as a personal bank loan
Why should you care about your net worth?
1. It shows your financial health status precisely
To achieve your financial goals, and whether you’re on track, you need to find out your net worth so you can determine if you’re financially fit. If you have a negative net worth, then it’s a red flag for you to take steps in clearing your debts such as debt consolidation with a personal loan or a credit card balance transfer plan.
2. Know where you’re spending too much
By listing down your debts, especially big-ticket items such as a car loan or house loan, you will able to identify if you are overwhelming yourself with too many expenses. This is also a good time to go into details of your spending especially on your credit card and make healthy adjustments to achieve a higher net worth.
3. It is a good measurement to set financial goals
By knowing how much your net worth is today, you can easily set the targeted net worth you want to achieve over the next five or 10 years by managing your assets (cash, savings, investments & income-generating assets) as well as your debts carefully.
Be careful when taking on a new loan and make sure your debt service ratio does not exceed 50%, which is the safety limit set by the government agency, Agensi Kaunseling & Pengurusan Kredit (AKPK). For those who do not know what a debt service ratio is, read this.
In addition to that, you should try your best to focus on investing your money in assets that generate income
While you may think that buying a property is a good investment, it could actually be a liability given that you are paying off the mortgage every month. Property is only considered an asset once it manages to generate income that covers or is higher than your monthly mortgage repayment.
In a way, managing your net worth is similar to managing a company’s income statement and balance sheet
The bottom line is, make sure your income/assets value is higher than your debts/liability.
This article first appeared on CompareHero.my