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Start 2020 knowing your net worth

Your net worth is nothing but the combination of your liabilities or loans, your investments and your cash.

Net worth is not just something that companies strive to achieve; individuals too can check on their net worth to enhance personal financial decision making. Your net worth is nothing but the combination of your liabilities or loans, your investments and your cash. 

How to calculate your net worth

First calculate the total value of your outstanding loans. In this calculation, include any housing loans, personal loans, gold loans and even credit card over dues that you may have. Do not include loans taken for your business. Be sure to include the current value of the principal outstanding rather than the original loan value. This becomes the liabilities side of your net worth. 

For the other side, which shows your assets, includes money lying in your bank, bank deposits, debentures, mutual funds, shares, gold and any other such asset you own. Include balances across your various bank accounts and even small savings certificates.  

Inclusion of insurance linked investments does get a bit confusing. If it is a unit linked policy, include the current market value of the units and not the sum assured; best to leave out an endowment or money back policy as it does not add to your current net worth. Those values are relevant only when you get the money. A pure term insurance policy is not an investment; hence, you need not include that at all. 

Don’t forget your EPF

What you can add to this pile is your employees provident fund balance (and public provident fund balance, if any). This is not always available, but you can get it either from your organisation or on the online portal. Add this to your total asset calculation. 

Lastly, add the value of any real estate that you own, consider the current market price. 

From the total of your assets, deduct the total of your liabilities, the figure that you arrive at becomes your net worth. 

Use your net worth as a guide for your future money decisions. Many a times, we calculate our net worth simply based on the value of our assets, without taking into consideration the liabilities side. 

How to use it?

Use your net worth as a guide for your future money decisions. Many a times, we calculate our net worth simply based on the value of our assets, without taking into consideration the liabilities side. 

For example, a house worth Rs 1 crore should be included in your net worth only after deducting the Rs 60 lakh loan outstanding; the house finally contributes the difference or Rs 40 lakh to your overall net worth. If you have taken personal loans or home improvement loans to do up your house, then those too needs to be adjusted. 

For someone who has too many liabilities, the net worth will be negative. Unless the liabilities are reduced, you will not be able to generate positive return on your net worth.  For another, the realisation could be that you have low liabilities and hence, can take more proactive choices on the asset side towards generating long term wealth. 

Having this concise picture of your net worth can help you maximise your growth versus risk grid when it comes to making effective money choices. Start the new year being informed about your financial position to help you make the right changes towards financial wellbeing.

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