Every year, we write about Malaysians coming to the Lists of Forbes Billionaires according to their estimated net worth. It’s a term that often feels polite in the context of the rich, but we all have a personal net worth that we’ve probably never calculated.
Here you will detail what it is, why it matters, and how you can calculate with online resources to better understand and manage your finances.
What is net worth?
Simply put, your net worth is the difference between you own (assets) and what you duty (passive). Your assets include cash and investments, any real estate, cars and more, for example. On the other hand, loans, accounts payable (AP) and mortgages would make up your liabilities.
But before you look at how to calculate your net worth, it’s important to first understand why you want to do it.
What’s the point of knowing him?
If you are applying for a loan, whether for personal or business reasons, your equity may be important information for your lender. It gives them an accurate view of your finances and how much they can recover from the sale of your assets if you default (don’t pay off your loan).
Calculating your net worth also gives you an overview of your financial health in black and white. Say if the figure is negative, it means you owe more than you have, and vice versa if it is positive.
But having a negative equity does not immediately equate to being financially irresponsible. Instead, it just means you have more liabilities than assets, at least for now.
Knowing all this can be beneficial, as it can push you to think about what actions you can take to reduce your debt and grow your assets. Because, like COVID-19 cases, your net worth will fluctuate. However, like the pandemic, the general trend is important.
In theory, your net worth will grow as you age by settling loan repayments, acquiring more assets, earning higher income, and so on. However, your net worth may also decrease as you age as you begin to leverage your savings and investments for retirement funds.
Neither is thereideal“Or” healthy “equity, as it depends on each person’s unique financial situation and goal, so you’ll need to determine your own goals and work on them. Knowing your equity provides you with a baseline to find out how much more you will need to achieve this goal and allow you to chart your plan.
So how do I calculate it?
First, compile all your financial statements in one place and indicate the total value of your assets. They include the total amounts of:
- Checking and savings accounts;
- Physical cash;
- Brokerage and retirement accounts;
- The market value of your home;
- The value of items that can be sold at home (jewelry, electronics, furniture);
- Rental income after deducting the home loan and costs;
- Vehicles (cars, motorcycles or boats);
- Cash value of life insurance;
- Investments (shares, bonds, unit trust).
Then deduct the total amount of your intangible assets and liabilities, which are all of your outstanding debts, such as:
- Home loans (mortgage, equity loan, line of credit);
- Car loans;
- Pending credit card bills;
- Student loans;
- Medical bills,
- Taxes due;
- Personal loans;
- Other bills or outstanding debts.
Once you have collected all of your amounts, you can use the formula: Net Asset Value = Total Assets: Total Liabilities to determine your net worth.
What resources can help me calculate it?
Of course, the collection part is still up to you to determine when determining the amount of each asset and liability. However, it’s important to make conservative estimates when assigning a value on certain assets to avoid having an unrealistic view of your wealth.
Unlike taxes, there is no set rule about how often you need to calculate your net worth. Keep in mind that the goal is to keep track of it it is not so that you maintain a high net worth at all times. Rather, it’s about making sure you’re on track to achieve your short- and long-term financial goals, whether it’s to buy a house, a car, or start a business.
Other data points that provide you with more useful information are yours credit score (shows the degree of manipulation of the borrowed money), debt-to-income ratio (show your financial extension through the amount of your monthly income to cover what you have to pay) and your amount retirement savings score (show your future living standards according to your current age, salary and retirement savings)
- You can read other articles we have written about money management here.
Featured Image Credit: Robert Kuok by SCMP / Ananda Krishnan via Wikipedia