How Much Is Your Net Worth?
Ever wondered how much you are worth? While it may be hard to quantify your true worth (we’ll leave that to the existentialists), you can quantify your net worth or the true state of your finances with a tried-and-tested formula.
What is net worth? In simple terms, it is the value of everything you own, minus all your debts.
Knowing your net worth will give you an accurate picture of where you stand financially, allowing you to assess your financial progress (or transgressions) from year-to-year. Knowing your net worth can also serve as an incentive to clear off your debts and save for retirement, among other financial goals.
How to calculate my net worth?
The actual calculation of your net worth is pretty straightforward. You add up the value of everything you own (your assets) and minus from that amount the sum of all your debts (your liabilities). The resulting number is your net worth.
In theory, your net worth is what you will have in cash if you sold every significant asset you own and paid off all your debts.
If you have more liabilities than assets, you will have a negative net worth.
One might end up with a negative net worth as a result of taking out a substantial loan or a number of loans. For instance, one might have used a student loan to pursue higher education. Although education increases the likelihood of higher future earnings, that potential is not a tangible financial asset.
Over-borrowing or poor financial management, such as racking up huge credit card bills and not paying them off in time could also accumulate to a large amount in your liabilities column.
However, having negative net worth does not necessarily mean you have to declare bankruptcy as long as you can service your debt in instalments.
How to improve my net worth?
Many people panic when they calculate their net worth and discover that it is negative. The case is true for many students and young working adults with a depreciating automobile. If you are one of those in the red, do not despair, for there are measures you can take to increase your net worth.
One way to do this is by paying off your debt. Start with identifying high-interest debts such as an outstanding credit card balance and aim to clear that off first, so you pay less interest in the long run.
If you’ve racked up a substantial amount of debt on a high-interest credit card, you may consider applying for a balance transfer credit card with a lower interest rate. Doing so can help you save money on your existing credit card debt and may even help you clear your debt faster. The Maybank 2 credit cards offer one of the best balance transfer rates.
Opting for a balance transfer card also makes your life easier, as you will have just one card to keep track of and one payment to make each month. The downside is, most balance transfer credit cards require good to excellent credit ratings for approval so be sure you qualify for one before you apply.
You may also engage a financial advisor to help get you off the negative track. An experienced advisor will be able to assist in planning and budgeting, as well as equip you with all the latest information on ways you can utilise tax breaks and grow your assets. Never be ashamed to ask for help and use the resources that are available.
To increase your overall net worth, also consider ways to boost your assets by making your money work harder for you. If your hard-earned savings are stashed beneath your pillow, then you’re probably not doing a very good job at that.
It also pays to cut down on expenditure and avoid blowing away any windfalls you may receive. Instead, put them into your investments to continue to reap the benefits well into your future.
The main intent here is not to turn into Scrooge and start living like a hobo, but to become more aware of your spending habits and identify areas where you can make adjustments to elevate your net worth.
The bottom line
There is no magical formula to increasing your net worth, but every time you decrease your debt and increase your assets, your net worth goes up.
Experts recommend reviewing your net worth every six months to a year.
Doing so too often may cause unease and unnecessary panic. For example, if you had a large credit card bill one month, it could throw your net worth off momentarily, which could throw you off mentally too.
Bear in mind that your net worth is not constant, but fluctuates throughout your adult life, corresponding to the changes in income and spending habits.
Growing your net worth is not something that will happen overnight. Like most things worth paying attention to in life, the process requires careful and consistent planning in order to achieve success. This is a good first step to get an idea of where you’re at now and with some foresight and perseverance, you can improve your financial outlook and provide yourself with a financially sound future.