Understanding & Leveraging Your Net Worth

No matter how much (or less) you know about investments, stock markets, credit cards and insurance, if you do not know your own money well, you will most likely fail in the planning process. One of the most critical steps in the financial planning process is to know your money, that is, your financial position, well, and then be able to manage it wisely.

Knowing your net worth helps you set a baseline for measuring the growth of your wealth annually.

Your net worth is the amount by which your assets exceed your liabilities. In simple terms, net worth is the difference between what you own and what you owe.

Let's understand this with Rohan's example:

Rohan's Assets:

• Savings account: ₹1,50,000

• Fixed deposits: ₹3,00,000

• Mutual funds: ₹2,00,000

• Provident Fund: ₹4,50,000

• Car: ₹3,00,000 (current market value)

• Total Assets: ₹14,00,000

Rohan's Liabilities:

• Car loan: ₹1,80,000 (remaining amount)

• Personal loan: ₹80,000

• Credit card debt: ₹40,000

• Total Liabilities: ₹3,00,000

Rohan's Net Worth = ₹14,00,000 - ₹3,00,000 = ₹11,00,000

If your assets exceed your liabilities, you have a positive net worth. Conversely, you have a negative net worth if your liabilities are greater than your assets.

Take Priya's case:

Priya's Assets:

• Savings account: ₹60,000

• Fixed deposits: ₹1,20,000

• Car: ₹2,00,000 (current market value)

• Total Assets: ₹3,80,000

Priya's Liabilities:

• Education loan: ₹4,00,000

• Car loan: ₹1,50,000

• Credit card debt: ₹30,000

• Total Liabilities: ₹5,80,000

Priya's Net Worth = ₹3,80,000 - ₹5,80,000 = -₹2,00,000

Priya has a negative net worth of ₹2 lacs. This doesn't mean she's doing poorly - she's invested in her education, which should increase her earning potential. However, she needs to focus on reducing liabilities and building assets.

Your net worth provides a snapshot of your financial situation at any time. When calculated periodically, it can be viewed as a financial report card that allows you to evaluate your current financial health and helps you figure out what you need to do to reach your financial goals.

Net Worth = Assets - Liabilities

Since each person's financial situation and goals are unique, it is difficult to establish a generic "ideal" net worth that applies to everyone. Instead, you will have to determine your ideal net worth, which is where you want to be in the near and long term.

Reviewing your net worth statements over time can help you determine:

a. Where you are currently.

b. How to get where you want to be in the future.

Let's see how Rohan's net worth changes over 3 years:

Year 1: ₹11,00,000 Year 2: ₹13,50,000 (increase of ₹2,50,000) Year 3: ₹17,20,000 (increase of ₹3,70,000)

This growth shows that Rohan is heading in the right direction—reducing debt while increasing assets. His net worth grew by 56% over just three years!

If Rohan's net worth had decreased over time, it would have been a wake-up call that he was not on track with his financial goals.

Calculating your net worth annually is a good practice to ensure you're constantly moving forward financially.