Every year, we write about the Malaysians who make it to the Forbes Billionaires lists based on their estimated net worths. It’s a term that often feels brought up in the context of the rich, but we all have personal net worths that we probably have just never calculated.
Here, we’ll break down what it is, why it matters, and how you can calculate it with online resources to better understand and manage your finances.
What Is A Net Worth?
Simply put, your net worth is the difference between what you own (assets) and what you owe (liabilities). Your assets include cash and investments, any real estate you own, cars, and more, for example. On the other hand, loans, accounts payable (AP), and mortgages would make up your liabilities.
But before we go into how to calculate your net worth, it’s important to first understand why you’d want to do so.
What’s The Point Of Knowing It?
If you’re applying for a loan, whether for a personal or business reason, your net worth can be important information to your lender. It provides them with an accurate view of your finances and how much they can recover from selling off your assets if you default (fail to pay back) 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 own, and vice versa if it’s positive.
But having a negative net worth doesn’t immediately equate to being financially irresponsible. Instead, it just means that 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 actionables you can take to reduce your debt and grow your assets. Because like COVID-19 cases, your net worth will fluctuate. However, also like the pandemic, it’s the overall trend that’s important.
In theory, your net worth will grow as you age through settling loan repayments, acquire more assets, earn a higher income, and so forth. However, your net worth can also fall as you get older when you start tapping into your savings and investments for retirement funds.
There’s also no “ideal” or “healthy” net worth, as it depends on each person’s unique situation and financial goal. Hence, you’ll have to determine your own targets and work towards them. Knowing your net worth gives you a baseline to figure out how much more you’ll need to reach that goal, and lets you map out your plan.
So, How Do I Calculate It?
First, compile all of your financial statements in one place and list down your total asset value. They include the total amounts from:
- Checking and savings accounts;
- Physical cash;
- Brokerage and retirement accounts;
- The market value of your home;
- The value of resellable the items in your home (jewellery, electronics, furniture);
- Rental income after deducting property loan and costs;
- Vehicles (cars, motorcycles, or boats);
- Cash value of life insurance;
- Investments (stocks, bonds, unit trust).
Then, deduct the total amount of your intangible assets and liabilities, which is all your outstanding debts, such as:
- Home loans (mortgage, home equity loan, line of credit);
- Car loans;
- Outstanding credit card bills;
- Student loans;
- Medical bills,
- Taxes due;
- Personal loans;
- Other bills or outstanding debt.
Once you’ve compiled everything and its amounts, you can use the formula: Net Worth = Total Assets – Total Liabilities to determine your net worth.
What Resources Can Help Me Calculate It?
Of course, the compilation part is still up to you to figure out yourself when determining the amount of each asset and liability. It is, however, 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 on how often you should calculate your net worth. Bear in mind that the goal of tracking it isn’t so that you maintain a high net worth all the time. Rather, it’s about ensuring that you’re on track to hitting your short-term and long-term financial goals, whether it’s buying a house, car, or starting a business.
Other data points which actually give you more actionable information include your credit score (shows how well you handle borrowed money), debt-to-income ratio (shows how financially stretched you are through how much of your monthly income goes to cover what you owe), and your retirement savings score (shows your future lifestyle standards based on your current age, salary and retirement savings)
- You can read other articles we’ve written about money management here.
Featured Image Credit: Robert Kuok by SCMP / Ananda Krishnan via Wikipedia