Why should you calculate your net worth?
The net worth of an individual is defined as the difference between the assets he owns and the liabilities he owes. Therefore it lets you know whether you are building on assets and whether your financial health is in good shape. Also it tells you the amount of liquidity or cash you have. Last not least, it indicates whether you are controlling the interest rate on your assets and liabilities.
What are your assets?
Assets can include land and house, cash, stocks, vehicles, mutual funds, provident fund, art, gold, jewelry, electronics or other consumer durables. You need to take into account the depreciation while calculating the market value of your electronics, cars or other consumer durables.
The liabilities will include any outstanding on home loans, cars and other consumer durables. It will also include outstanding on credit cards and other loans that you might have taken from friends and relatives. The difference between the assets and liabilities gives you the net worth. Is it growing every year? A growth in your net worth indicates that you are financially sound. The net worth therefore is a useful tool to determine whether you are making financial progress or not.
You also need to ensure that you have enough cash to meet sudden expenses like an emergency and expensive hospitalization. The thumb rule for asset management is that about 25% of your income should be used for creating assets and approximately 20% should be liquid assets.
Another important aspect that a net worth calculation provides is the mismatch in the interest rate on your assets and liabilities. If you are paying a higher interest rate on your liabilities, then it is better you pay off the debts by breaking your assets.
You should check your net worth every year and benchmark it against the last year performance. That way you have a handle on your net worth management. The details of your assets and the corresponding values can be entered in an Excel worksheet and the value of the total assets can be calculated using a ‘sum’ formula. Similarly the liabilities descriptions and values can be input in parallel columns and the total of the liabilities calculated using the ‘sum’ formula again. Then using the formula ‘= total_assets-total_liabilites’ you can easily find your net worth. Using the formula ‘=today()’ you can display the date of your net worth calculation. On the top of the worksheet you can merge and wrap a few cells to give a title to your worksheet called ‘NET WORTH CALCULATOR’. Of course, the worksheet tab can also be renamed to ‘networth’.