In financial discussions, we often hear about individuals whose net worth has increased or decreased. Some make it into the top ten net worth lists, while others drop out. But what exactly is net worth, and why is it important?
What Is Net Worth?
Net worth is a financial term that represents an individual's financial health. It is calculated by subtracting liabilities from assets. Simply put, if a person sells all their assets and pays off all their debts, the remaining amount is their net worth.
Why Is Net Worth Important?
Net worth provides a comprehensive picture of your overall financial health. It helps in tracking progress toward financial goals like retirement, buying a house, or purchasing a car. Additionally, understanding your net worth can guide you in determining how much debt you can handle and how much risk you should take with investments.
Financial institutions and lenders also use net worth to assess an individual's creditworthiness. A high net worth can lead to more favorable terms and interest rates on loans and credit cards.
Calculating Net Worth
To calculate your net worth, follow these steps:
List Your Assets: Include everything of monetary value, such as:
- Bank savings
- Investments (stocks, mutual funds, crypto)
- Property (home, car)
- Other valuable items (jewelry, electronics)
List Your Liabilities: Include all debts, such as:
- Loans (home loan, car loan)
- Credit card debt
Subtract Liabilities from Assets: The formula is:
Example Calculation
Consider John, a 30-year-old earning ₹80,000 per month. Here's how to calculate his net worth:
Assets:
- Bank savings: ₹2.5 lakh
- PF: ₹1 lakh
- FD: ₹1 lakh
- Gold: ₹3 lakh
- Stocks: ₹2 lakh
- Mutual funds: ₹50,000
- Crypto: ₹20,000
- Property (car and electronics): ₹8.8 lakh
Total Assets: ₹23 lakh
Liabilities:
- Car loan: ₹7.5 lakh
- Credit card debt: ₹50,000
Total Liabilities: ₹8 lakh
Net Worth Calculation:
By following these steps, you can calculate your net worth and gain valuable insights into your financial position.
