An individual’s net worth is nothing but the difference between the assets and liabilities materializing in his/her finances. If the assets acknowledged by a person are greater than the liabilities then s/he will have a positive net worth and vice versa. Calculation of net worth is more uncomplicated than it sounds. The most significant aspect is that it gives an overview of your financial health in an instance. Once you understand your financial health, you will be capable to figure out how to bring it to optimum circumstances and or how to maintain it. This is why calculating net wealth is essential.
Let us see how net worth can be an important aspect of personal finance.
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Practically states when you can retire (Either early or max aged)
The query where all personal finance answers are routed to, yet nobody knows it specifically. Although one method to find it in an absolute sense is by weighing in the net worth question. For instance, there is a couple who earns Rs 20-25 LPA and has assets worth more than Rs 1.2 crore. Now, the same couple also has Rs 50-55 Lakh in debt as of the date of calculation. The net wealth of that couple here will come at Rs 70 Lakh (1.2 cr – 50 lakhs), which is positive but does it represent the couple can retire? The debt of Rs 50 Lakh is being repaid by numerous EMIs, which are being catered to by the yearly income payment of Rs 20 LPA. Therefore, in case the couple chooses to retire they cannot afford the EMIs anymore so they will require to cash in all the assets and pay the debt. After this, they will be left with Rs 70 Lakh without any assets, which may or may not be considered enough to retire.
Re-align your goals
Negative net worth requires not rocket science to figure out that your financial health needs saline. It’s like using mobile GPS — once you know where you stand and have a short idea of where you want to be, finding the road can be comfortable. Moreover, even if your net wealth is positive, you may have fallen off the footpath in achieving your destination. In such cases, net worth calculation assists you to change your savings, investment, and spending habits to re-align with your financial goals.
A look at assets from a different perspective
In a broad view, Debt is something you owe to someone or some entity, while assets are something you own. But the description of assets and liabilities in net worth goes beyond this. Debt can be classified as long-term or short term but in the end, both of them require to be paid. The significant categorization is assets, which can either be current or non-current assets. The current assets can be converted into cash at the lowest time, which is the opposite of non-current assets. For better understanding, here’s an example of an individual holding a non-current asset worth one crore rupee, which prima facie appears good enough for retirement, without debt. However, if such an asset is your home, which may not convey income today or in the future, such an asset may not be completely helpful nor can your retirement be dependent on such asset. Net worth benefits you understand assets and liabilities from a different perspective. It differentiates assets in a way that benefits you identify assets that can generate income for the future
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Better net worth equals to longer credit period
You may hear the name called CIBIL score? Net wealth is not too far from it and in particular, may give more precise information than CIBIL. Net worth in easy terms states the worth of an individual. Thus, positive net worth can convey you better loan deals from banks. But such positive net worth shall be after taking into concern the prospective loan. The cause being the difference between assets and liabilities may not be effective enough, which might result in negative net wealth after borrowing. Banks and lenders have a closer look at your net wealth and when in need of funds, a negative net worth may go against you.
Net worth is not a financial statement, it is an eye-opener that can assist you to make better financial decisions.