In simple terms, net worth is the amount by which assets exceed liabilities. It is value in cash that you would sell off all that you own and clear your EMIs. It is a metric to evaluate an individual’s or company’s financial standing. Assets can include retirement accounts, cash present in a bank account, mutual fund in India or other investments, home value and costly personal property like collectables or jewellery. Liabilities mainly means debts from credit cards, mortgage and student loans.
Net worth often comes across as a ‘snapshot’ of where you stand in your financial journey. It is like a report card that lets you evaluate the current status and figure out the next moves to reach your short-term and long-term goals in future. You can track your progress each year and set definite goals accordingly to improve with time.
The Importance of Net Worth
Net worth is a quantitative concept that measures the value of sectors, an entity, individuals, corporations and countries. It helps you see the bigger picture and work on your savings or other financial targets. Here’s why you must have an idea of your net worth.
- Knowing your financial position can help you identify the areas where you are spending too much and then be mindful to avoid excess cash outflow. You are likely to make sound monetary decisions to achieve your goals without hiccups. The best way to improve the net worth is to either ease your liabilities while assets stay constant or increase. Try to review your statement from time to time to gain insight into where you are and what to do to get to where you want to be.
- Use a net worth calculator by entering your assets and liabilities to find your worth. Once you know the balance, it becomes easier to plan your debts. For example, you might have enough free cash at the moment to make prepayments and clear your debts quickly. At other times, a net worth calculation might tell you that you do not have sufficient funds. So, now you have to avoid channelling extra money into the debt bucket and stash some amount into your emergency bucket. Having a fair idea of net worth helps you develop a logical plan and maintain better financial health.
- Your assets are things that you own that can be converted into cash. This includes vehicles, real estate or retirement corpus. Knowing your net worth can help plan for different mutual funds to invest in, how much to put into FDs and the amount you can save. Know that net worth can continue to grow with time as and when you clear debts, build better equity and obtain more assets in your name.
The goals and financial status of each person are unique. So, it is vital to determine your ideal net worth to be able to live a comfortable lifestyle while ticking off your milestones. Net worth can be an aggressive motivator to help you save or invest money. Make the most of the net worth calculator to come to a realistic figure today.