If you have ever wanted to calculate your net worth inspired by celebrities or prominent personalities, you are not alone! All of us have been there pondering and wrecking our heads about this one topic, and luckily, our blog will answer all your questions. So, what exactly is net worth, and is it calculated according to your annual income?
In the simplest terms, net worth takes into account all of the things you’ve ever purchased/inherited, or owned. This includes all your assets (financial as well as non-financial). Your total debts are deducted from the value of total assets to calculate your actual net worth. For most people, net worth indicates their financial standing and it is certainly a powerful metric to understand how you are doing with your money and assets. Contrary to popular opinion, it is not calculated according to your annual income.
But how exactly do you determine your assets? Can you take the furniture, properties, and jewelry you own while determining the value? Will your rented apartment be included in the net worth? What are non-financial assets? Well, these are some of the many questions we will answer over this blog. So, if you are looking for a fool-proof way of determining your financial worth, here is everything you need to know.
Is the value of net worth important?
Typically, your net worth indicates the amount of cash you are to have if you get all of your assets sold and paid off every existing debt. For some people, this number turns out to be negative, which is indicative that your liabilities are more when compared to assets.
Although this is isn’t necessarily an ideal scenario, very often people consider calculating their net worth before joining a new job. In this scenario, your net worth will be the measure of your outstanding debts, if you still sold off everything to pay it off.
It is worth noting here, that unlike a lot of things when it comes to finances, there isn’t any ‘ideal’ number that you should aim for. So, your net worth is but a medium of tracking your annual progress on paying off debt and improving savings. Calculate your net worth for the last five to see if you’ve improved.
What’s included in your net worth?
As previously mentioned, all the assets you own will be considered while calculating your net worth. To make things simpler, start grouping your biggest asset. This can be the value of the apartment you own, the business you own, the properties you own, the stocks and bonds you’ve invested in, the jewelry you’ve purchased, the furniture you own, and any other valuable either purchased or inherited.
In case of liquid assets like your savings account, try getting the latest statements. The same applies to your checking account, cash deposits, disposable cash, brokering accounts, retirement funds, and everything in between.
As previously highlighted, your items of value will also be considered while calculating the net worth. This includes the vintage coins you have collected, the instruments you own, family heirlooms, a rare souvenir, et al. While we would not recommend itemizing everything, you might want to calculate the items that cost more than $500.
Finally, when you are done listing out the assets, calculate their total value to get your net asset value. The rule of thumb here is to consider everything you own and not the things you have rented. So, make sure you consider this point while making the calculations.
What’s not included in your net worth?
To put it simply, anything you do not own but still need to pay for is counted as your liability. So, the apartment you rented is not your net worth, but a liability since you need to pay mortgage bills for it. Similarly, the installments you pay for your education loan, car loan, or any other personal loan will be calculated as a liability. Your credit card balance will also be added to this list. In other words, anything you owe is a liability.
To calculate net worth, it is important to list out all your debts and add them up. Once you have a number, deduct it from your total asset value to get your net worth.
Is annual income linked to net worth?
While a competitive annual income can certainly help boost your net worth, it may not always be the case, if you have multiple outstanding debts. Since your net worth refers to the value after deducting the liabilities from your assets, if your credit card or installment bills are high enough, even a competitive salary won’t be of much help.
Your annual income will be only taken into account when you can save the most of it by keeping the extra amount in your emergency account or any other high yielding account. You can also invest in stocks and bonds to boost your total net worth.
As tempting as it may seem, try to be fairly conservative while calculating the current value of your home, car, and similar other assets. While you can always pump up the value to make it appear nice on paper; this isn’t really recommended as it doesn’t give you a correct value of your net worth. If you are still unsure about getting started, get a budgeting app for automatically tracking this value/
We would also recommend keeping your liquid funds in accounts with high yield. This will boost your total income, especially if your annual package is competitive enough. If you have a bunch of debts, make them your priority. You might also want to consider debt consolidation or refinancing options, where the interest rate is significantly lower. Over time, this will help you speed up your repayment.
After calculating the net worth, also make it a point to closely monitor your budget for areas where your expenses can be significantly reduced. Also, try allocating a major part of your money for savings or repayment of debt. In case you are still left with more disposable amount, put them in your emergency fund. This way, you will end up saving most of your money and be left with higher net worth.