Are you aware what your Net Worth is? It is basically how much you own & how much you owe! Net Worth is probably the important measure of your Personal Finance, which is why knowing it is so crucial. Net Worth is crucial if you are in order to achieve Financial Independence & reach Retirement! It is meant for everyone & not only for the rich.
Well, how do you calculate your Net Worth…???
It is a simple formula…
Net Worth = Assets – Liabilities
If your Assets exceed your Liabilities, you have a positive Net Worth whereas if your Liabilities are greater than your Assets then you have a Negative Net Worth!
Your Net Worth can be viewed as a Financial Report to evaluate your current Financial Health & guide you in reaching your Financial Goals.
Here are some reasons why knowing your Net Worth is important…
- Most accurate measure of Wealth
There is no way to know exactly how wealthy you are if you don’t know your Net Worth. It gives you a Snapshot of what you own & owe. It highlights how much you will have after paying off your Debts.
- Tracks your Financial Progress
It enables you to measure your Financial Progress periodically. A growing Net Worth is a sign that you are doing good whereas a decline shows you have got more work to do!
- Important while applying for a Loan
Net Worth is the best measure of your overall Financial Strength thus, Lenders determine whether you will be able to repay the Loan.
- Moving the Financial Focus beyond Income
Your overall Wealth is often linked to your Income Level. It has some value but it does not count your Monthly Expenses. If your Income is increasing but your Net Worth is flat or declining…it shows that your Financial Situation is not improving.
- Focuses on both Assets & Liabilities
Some people may focus only on their Assets as a measure of their Personal Wealth. For instance, an Individual may flaunt his Rs. 2 crore property as his Asset ignoring Rs. 1 crore in Debt. Net Worth will give you a summary of your Asset as well as your Liabilities & help you repay your Debt quickly.
Therefore, calculating your Net Worth periodically is important. The bottom line is to improve your Financial Situation. Build up your Assets while keeping your Debt Level low!