One of the best ways to see how financially healthy you are is to calculate your net worth. You do this by preparing a personal statement of assets and liabilities.
This means determining the value of everything you own, getting the amount of all your debts and then computing the difference between the two.
In mathematical terms, your net worth is simply your assets minus your liabilities.
Before we go into detail on how to build a personal balance sheet, let us first discuss why it is important to know and monitor this value. There are several advantages and reasons why we should regularly take time and calculate our net worth.
Benefits of knowing your net worth:
- It serves as a reference point on your financial road map. It tells you how far or how near you are to financial freedom.
- It helps you review all your accounts. There may be investments that you need to check up on and debts that you’ve been ignoring. Furthermore, becoming aware of your most valuable assets encourages you to take measures to protect them.
- By listing down all your debts and liabilities, you can allocate your budget more efficiently. You can determine which debts must be paid first and what liabilities you can possibly eliminate.
- By monitoring the value of your net worth regularly, you’ll have a realistic view of your financial progress. Every time your net worth goes up, you’ll feel great about yourself and be inspired to continue saving money and investing. If it goes down, it will challenge and motivate you to do better.
- Lastly, by knowing your overall financial status, you’ll have a good grasp of how much risk you can tolerate when buying investments.
How to calculate your net worth
Ready to make your personal balance sheet? Here’s what you do: Grab a pen and some paper and start jotting down your assets. With each item, write down its corresponding current value. Here’s a short list of assets you might have:
- Cash on hand and in the bank
- Current market value of properties such as real estate, vehicles and jewelries
- Receivables such as money your clients and friends owe you
- Current market value of investments such as stocks, bonds and time deposits
Next, list down all your liabilities. Some of the items you should include are:
- Credit card debts
- Amount that still needs to be settled in your housing, auto or salary loans
- Insurance debts
- Other payables such as money that you owe from friends
After this, simply subtract the sum of your liabilities from the total value of your assets to get your net worth.
How can I tell if my net worth is good or bad?
In general, your net worth should be positive and initially, that is what’s important. Don’t fret if it comes up negative, it only means that you have a chance to make a lot of positive changes in your life in the coming months.
Remember that when it comes to net worth, the raw value doesn’t really matter as long as it’s positive. What is more essential and what you should actually focus on is increasing that value over time.
How often should I compute my net worth?
As often as you want to as long as you do. I calculate mine every two months and whenever I need to make a major financial decision. If you have investments and properties that fluctuate in value often, it’s best that you do it frequently.
Furthermore, whenever you do this, always check how liquid your assets are. This means calculating how much money is readily available to you. It’s important that you have enough cash on hand to prevent liquidation of your properties and investments at lower market value during financial emergencies.
How do I improve my net worth?
By acquiring more assets. This means being frugal to save money, setting up multiple streams of income and investing in profitable ventures. Furthermore, you should lessen your liabilities by paying bad debts, controlling your expenses and finding ways to convert your liabilities into assets.
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Photo courtesy of boboniaa
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