Five reasons why you should know your net worth
Most of us have never bothered to calculate our net worths. Maybe it is the fear of facing the truth or just because of a lack of financial literacy. Whatsoever may be the reason, it is extremely important to know your net worth to manage your personal finance efficiently. Here are some of the reasons why you should know your net worth.
What does net worth mean?
Net worth is calculated by subtracting your liabilities (what you owe) from your assets (what you own). Assets can include things like cash, real estate, investments made in stocks, bonds, etc. Liabilities include mortgages, car loans, student loans, credit card debt, etc.
How to calculate your net worth step-by-step
1. Add up the value of all your assets, including cash, savings, investments, real estate, vehicles, and personal property. Use their current market values. 2. Add up the value of all your liabilities, including mortgages, loans, credit card balances, and any other debts you owe. 3. Finally, subtract your total liabilities from your total assets to get your net worth.
Here's an example
Assets: Bank deposits: Rs. 5,00,000 Investments: Rs. 2,50,000 Real estate: Rs. 35,00,000 Vehicles and other depreciating assets: Rs. 5,00,000 Gold and other precious metals: Rs. 2,00,000 Total Assets: Rs. 49,50,000 Liabilities: Home loan: Rs. 30,00,000 Car loan: Rs. 5,00,000 Personal loan: Rs. 2,00,000 Credit card debt: Rs. 50,000 Total Liabilities: Rs. 37,50,000 So, your net worth is Rs. 12,00,000 (Rs. 49,50,000 - Rs. 37,50,000)
It will allow you to set short-term and long-term goals
Knowing your net worth can help you identify areas where you can cut back on spending or increase your income. So, you can free up money to put towards short-term goals such as saving for a vacation. For long-term goals, such as buying a home, knowing your net worth can help you determine how much you can afford to spend on a down payment.
It will keep your spending habits in check
By knowing your net worth, you can create a budget that aligns with your financial goals. A budget can help you identify areas where you may be overspending and make adjustments to your spending habits. Knowing your net worth can help you develop better spending habits by providing a clear picture of your financial situation and helping you stay focused on your goals.
It will help you stay motivated to invest your money
Knowing your net worth can be a powerful motivator that encourages you to save and invest your money. By calculating your net worth on a regular basis, you can track your progress over time and it might encourage you to continue saving and investing your money. You can set targets such as increasing your net worth by a certain amount each year.
It will help you plan for paying off your debt
Calculating your net worth and seeing how much debt you have can be a wake-up call that motivates you to take action. Once you know your net worth, you can prioritize your debt repayment strategy. By seeing the big picture, you may be more inclined to make changes to your spending habits and make debt repayment a priority.
It will help you in planning for your retirement
By knowing your net worth, you can set realistic retirement goals. You can estimate how much you will need post-retirement based on your net worth and plan accordingly. If you know your net worth, you can identify potential shortfalls in your retirement savings. If your net worth is not sufficient to cover your retirement expenses, you can adjust your retirement plan accordingly.