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Wednesday, October 27, 2010

How to Calculate Your Net Worth?

We go to a hospital or the family doctor from time to time for routine check-up. Even when we are not experiencing any problem, we do it - just to ensure that our physical health is fine.

As savvy investors, shouldn't we do some kind of check-up to evaluate our financial health too? Just like a physical health check-up, is there something that can tell us where we stand financially?
 
Yes, there is a tool available to find out just that - and it's called Net Worth.
 
What is Net Worth?

Net worth tells you where you stand financially. It is the sum of all your assets, less all your liabilities. It gives you the true picture of what you actually own.
 
For example, you might feel happy that you own an apartment. Yes, that is something to feel proud about. But if you have taken a loan for buying it (that is, if you have a mortgage on it), isn't that a liability tied to that home that you also have?
 
Since Net Worth calculation considers both assets and liabilities, it gives a truer picture of your financial standing compared to any other tool.
 
How to Calculate your Net Worth?
 
As such, calculation of your Net Worth is fairly simple. It is just the sum of all your assets less all your liabilities.
 
Net Worth = Sum of all Assets - Sum of all Liabilities
 
The problem is in recognizing the assets and liabilities!
 
Therefore, let me list down the items that you should consider as Assets, and the items that you should consider as Liabilities.
 
What you should consider as an Asset?
  • Market value of your house
  • Market value of any land you own
  • Market value of your shares / mutual funds
  • Market value of your car / two wheelers
  • Market value of your jewellery
  • Cash in your bank account
  • Cash at your home
  • Fixed deposits (FDs) that you have
  • Your balance in the Public Provident Fund (PPF) account
  • Amount in Post Office Monthly Income Scheme (PO MIS)
  • Amount in National Savings Certificate (NSC)
  • Amount in Kisan Vikas Patra (KVP)
  • Amount in any other debt schemes
  • Amount receivable from some other person
What you should consider as a Liability?
  • Outstanding principle on home loan
  • Outstanding car / two-wheeler loan
  • Outstanding personal loan
  • Any other loans outstanding
  • Credit card payables (full amount, not just the minimum due!)
  • Any bills payable
  • Any other payables
  • Your Net Worth
Now that you have listed all your Assets and Liabilities, just add up all the assets, and subtract all the liabilities from it. That is your Net Worth - something that you actually own!
 
 
You should find your Net Worth once every six months, so that you know what you own, and which direction you are going.
 
Needless to say, the higher the Net Worth, the wealthier you are!