What’s your net worth?
September 10, 2006
If you have to put a price tag on yourself, what amount would you pick? Determining your true net worth in real pesos is the first step towards financial independence. In fact, if you want to get ahead in life and be financially secure, you should know your net worth now.
Just what is net worth? It is the difference between your total assets and your total liabilities. It sounds pretty simple, but few people make time to calculate for it.
The Citibank Guide to Building Personal Wealth says few people enjoy calculating their net worth because it reminds them of their spending habits. However, facing problems and finding ways to solve them are part of the discipline of financial planning. “Financial planning is the most effective way of ensuring that your financial needs are met throughout life,” the book says.
Do the math
To calculate your net worth, you have to make a personal balance sheet. Start by listing down all your assets. The following sample list shows what may be considered as assets:
CASH
Current accounts
Deposit accounts
Foreign currency
Cash value of whole life insurance policy
Retirement fund
Others
FINANCIAL INVESTMENTS
Bonds
Equities
Mutual funds
Pension plans
Educational plans
1) Total Monetary Assets (Cash + Financial Investments)
FIXED ASSETS
Home
Other real estate
Car
Jewelry
Share of business
Others
2) Total Fixed Assets
3) TOTAL ASSETS (1 + 2)
Now for liabilities. List down all short-term (including utility bills) and long-term debts.
SHORT-TERM LIABILITIES
Electricity
Water
Telephone
Gas
Mortgage payment
Credit card loans
Bank overdraft
Car loan
Other loans
Taxes due (estimated)
4) Total Short-Term Liabilities
LONG-TERM LIABILITIES
Bank loan
Mortgage
Others
5) Total Long-Term Liabilities
6) TOTAL LIABILITIES (4 + 5)
To arrive at your net worth just follow this formula:
NET WORTH = Total Assets (3) – Total Liabilities (6)
Positive or negative?
What does your net worth show? A positive or high score means you are on the right track and should be thinking of investing effectively for the long-term to achieve your goals.
If you have a low or negative net worth, don’t lose hope. It merely signals that it’s time to be more disciplined in managing your money and building wealth so you’ll have enough assets to cover your liabilities. Reexamine your spending and aim to decrease your debts.
It may be helpful to make a personal monthly income and expenditure statement, where you list all your income in a month and itemize all expenses. Your net income will be the difference between your total income and total expenses. With this, you will see where you can cut down on expenses so you can put the extra cash in savings to increase your assets or pay off debts.
Some pointers
As your wealth builds up, it may be more difficult to calculate your net worth since many of your investments will fluctuate in value. But determining your net worth is important, so do it once or twice a year, or when you’re about to make a major financial decision.
If you have investments in foreign currency, use their value in local currency when doing your calculations.
Sound advice
Identifying your assets one by one will show you which category you have a sizeable investment in and where you should invest more. Maybe you have a lot more cash than is necessary, and it may be earning a low return. Or you may have a lot of fixed assets and very little liquid investments.
Bear in mind that when there is an emergency, it may be hard to convert fixed assets such as real estate, art collections, or jewelry to cash right away. Or you may see that there has been no provision made for your children’s education or for your own retirement. Think about allocating your assets proportionately in such a way that your financial goals may be met both in the short and long term.
So how much are you worth? Finding out your answer to that will set you on the road to financial well-being.
- From the "Take Charge of Your Money" series published on http://business.inq7.net/money/.
[tags]net worth, assets, liabilities, cash, investments, bonds, mutual funds, money management, money tips, finance guide, citibank, personal finance, wealth management[/tags]
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September 14th, 2006 at 8:42 am
[...] 1. Have a realistic picture of your financial situation. Compute for your net worth (total assets less total liabilities) to see where you stand on the financial front. This will let you see if you have enough assets to cover your liabilities, or need to be more disciplined in money management to increase your assets (e.g., savings) and decrease your liabilities (e.g., pay off debt). Make your own income statement too — identifying your income sources and expenses to help you determine where you can further cut costs. [...]