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How to calculate your net-worth and why it’s so important?

People and businesses work in order so as to earn something in return, that something is referred to money. Individuals and business do their part of responsibility and earn rewards. This entire income or wealth can be considered as worth for them. This entire income is called as Gross worth or income.  Net worth is the value of assets, minus the total of all liabilities. In simple words, net worth is whatis owned minus what is owed and it is very essential to know how to calculate net-worth.

While Net income or worth means an income from which loans, borrowings and debts are deducted and left as personal disposal income. Personal disposal income means the actual income available to an individual after all the deductions to spend on his personal needs and wants. Asset Management Company and Wealth Management Firms are those agents who help businesses and individuals to calculate and manage their net worth. To calculate net-worthis important, mostly to the businesses because this enables them to know their actual standing and position in the competition, also provide them with the net-worth of the competitor’s firm and understand the competition.

Individuals who generally are investors and the business firms are concerned to improve and have stable portfolio which is achieved through proper portfolio management.  A fair and transparent net worth is said to be authentic as well as ethical. Various sources of income are necessary to be earned from reliable sources and proper documentation and portfolio management is the key to it. Financial advisors also play an important role in calculating net-worth. Your net worth provides a snapshot of your financial situation at every point of time.

Importance of Net-worth

When net worth is calculated periodically, your net worth can be viewed as a your financial health and can help you figure out what you need to do in order to reach your financial goals. Your assets are anything of value that you own that can be converted into cash. Investments, bank and brokerage accounts, retirement funds, real estate and personal property etc. are some of the examples. One of the challenges in calculating your net worth is assigning accurate values to all of your assets. It’s important to make conservative estimates when placing value on certain assets in order to avoid inflating your net, in which financial advisors provide great help.



How to calculate net worth in methods:

Net Worth = Total Assets- Total Liabilities

1.    Calculate your Assets-


•    Start by listing your largest assets. For most of the people, this could include the value of their home, any real estate properties, or vehicles like personal cars or boats. In the case of a business owner, this list would also include the value of their business, which has its own more complicated calculation.

•    Next, you’ll want to gather your latest statements for your more liquid assets. These assets include checking and savings accounts, cash, CDs or other investments such as brokerage accounts.

•    Finally, consider listing other personal items that may be of value. These could include valuable jewelry, coin collections, musical instruments, heirlooms, a rare wine collection etc. Although it is preferable to seek help of either financial advisors, wealth management firms or Asset Management Company in listing your assets in right manner and right market price.  



2.    Calculate your liabilities:

•    Again, start with the major outstanding liabilities such as the balance on your mortgage or car loans.

•    Next, list all of your personal liabilities such as any balance on your credit cards, student loans, or any other debt you may owe.

•    Now, add up the balance on all of the liabilities you listed above.

•    Although it is preferable to seek help of either financial advisors, wealth management firms or Asset Management Company in listing your liabilities and debts in right manner and right market price.  



3.    Calculate your net worth:

•    To calculate your net worth, simply subtract the total liabilities from the total assets. For this exercise, it doesn’t matter how big or how small the number. It doesn’t necessarily matter if the number is negative. Your net worth is just a starting point to have something to compare against in the future.

•    Repeat this process at least once a year and compare it with the previous year’s number. By comparing the two, you can then determine if you are making progress or getting further behind on your goals. You may want to recalculate your net worth more often if you’ve embarked on an aggressive savings or debt repayment plan.



Thus it is important to calculate net-worth, as this will help you to keep you on track so that you can achieve your desirable goals and profits.