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Knowing your personal net worth and why it matters

So what is net worth and how do you compute it? Having understood what constitutes assets and liabilities, let’s look at this simple formula:

Net Worth = Assets – Liabilities

To begin, compile the value of all your assets onto a spreadsheet and calculate. This may include: * Physical assets like real estate property, cars, home furniture, business equipment, and anything else that you own. * Financial assets including cash, short-term and long-term financial investments like stocks, bonds, time deposits, business and rental earnings.

Liabilities are everything that you owe and need to pay for: a business, car loans, home mortgage, insurance payments, and yearly taxes. It also includes short-term loans, like your credit card.

You might need an accountant to help you assess the value of your assets and liabilities if these are spread out over long periods.

What net worth really means

After you’ve made your calculation, this all boils down to one figure: your net worth. It is your value as an individual today minus the liabilities. If your net worth is positive, great! It means that your financial decisions so far have succeeded in improving your financial standing. You may have made good investments in real estate, or are able to mitigate losses in your stock market investments, or your new business investment paid off. Whatever the reasons are, your personal net worth is good!

If your net worth is negative, it paints a picture of your financial situation, where you have unmet financial obligations that need to be addressed. These could be debts due to high mortgage payments, high tuition fees, or costly hospitalization or medical treatment. The way to address this is to reduce debt and reduce expenses, which usually requires an adjustment in your daily lifestyle.

What do you do next?

Assessing your net worth is a good exercise, regardless of the outcome, because it helps you plan what to do next.

If your net worth is negative, it only means that you will have to revisit all your sources of income and check against all your expenses. Work out a plan to reduce debt in a way that’s more manageable for you.

The easiest thing to do is to reduce your spending, whatever that may be. You can also temporarily cut spending on discretionary expenses like meals, clothes, and travel. Also, focus on further reducing your credit card bills, which have some of the highest interest rates in the market.

After exercising debt reduction, you can do debt consolidation. It may not be possible to get a reduction on car loan payments, but a recalculation on your home mortgage is possible, based on your financial standing and a reassessment of your assets and liabilities.

Growing your wealth

If your net worth is positive, you may wish to consider exploring other investments to grow your wealth.

Traditionally, financial assets might include money market instruments, stocks, bonds, mutual funds, and unit investment trust funds. However, the scope also includes assets such as real estate, commodities, or even structured products and cryptocurrency.

With such a wide variety of alternatives, it may be confusing to understand which assets are suitable for you and how they might be combined with one another to meet your wealth goals.



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