The first thing that might cross your mind when you hear the word net worth, must be some billionaire or business tycoon. Or the recent one in the news, Gautam Adani, who has a net worth of $ 135 billion currently, making him the third richest in the world. We have all read multiple news stories and articles mentioning how his net worth has grown over the years.
What I am trying to say is, we consciously or unconsciously, connect the word net worth with rich and wealthy. But this should not be the case. All of us, not only business tycoons and prominent CEOs, should be aware of our net worth as it is an excellent indicator of your financial situation.
Calculating your net worth can help you understand where you are in your financial path and what needs to be done to reach your financial objectives. It isn't simply about knowing how much debt you have or making yourself feel bad about your present financial condition. Instead, your net worth provides you with a general picture of your financial condition at any point of time.
Okay, you get this. But,
What exactly is net worth and how to calculate it?
A person or institution's net worth is determined by deducting the value of all of its outstanding liabilities from the total value of all of its financial and non-financial assets. It the the difference between what you own and what you owe.
Simply put, net worth is the sum of your assets minus your liabilities. If your assets are more than your liabilities, your net worth is positive. In contrast, you have a negative net worth if your liabilities exceed your assets.
Net worth = Assets - Liabilities
There is also a general guideline for what should be your minimum net worth.
If you are employed:
Net worth = [(Age x Annual Household Income)/10] – Inheritances
If you are a student or just started working:
Net worth = [((Age-27) x Annual Household Income)/10] – Inheritances
How to manage your net worth?
You should calculate your net worth at least once a year so that you can see the general direction of your money.
If your net worth is negative, your goal should be to pay off your debts as soon as feasible. You don't necessarily need to acquire more expensive assets if you have a negative net worth. Instead, you should strive to pay off your debt as quickly as possible so that your assets start to surpass what you owe.
If you have a high net worth, you may live the life you want without worrying about how every choice will influence your money because you will be able to reach your financial objectives, be financially secure, and live the life you desire.