How to calculate your net worth.
Net worth! Me? Hold up! I know I am taking active steps to put my finances in order by saving and investing, but net worth? I thought stuff like these were reserved for celebrities? You are definitely talking to the wrong person!
Well well, if this sounded like you, I totally understand. You see, the concept of tracking personal net worth is not a conversation we have heard enough of and when the term is mentioned, it’s usually in regards to how wealthy one celebrity is over another. For example, Rihanna’s net worth over Beyonce’s or Tiwa Savage’s net worth over Yemi Alade to prove a point over which celeb has more money in the bank!
But what about your net worth??
What is net worth?
Your net worth is a snapshot, an overview of your current financial condition. It is basically the total value of your assets (things of value that you own) minus your liabilities (things that you owe).
In financial terms, assets mean valuable items that can generate cash or have the potential to generate cash in the future e.g., investments, gold, property, lands, cars, jewellery, cash in the bank, artworks, stocks, pensions, etc. While liabilities are expenses that take from you eg, mortgage, rent, outstanding bills, loans, etc.
Knowing your net worth is essential to setting smart financial goals. Before you can take realistic steps to fix your finances, you need to know where you are, in order to move to where you need to be. Answering this critical question is the job of your net worth statement and in this article, I will give you the low down on everything you need to know about calculating your net worth.
How to calculate your net worth.
The formula for calculating your net worth is Assets- Liabilities= Net worth.
To calculate your net worth, you must first make a list of everything you own(Assets), as well as any outstanding debt. We also include things that you may still be paying for, such as a car or a house, when we say own. In other words, even if your assets are not fully paid for, still include them as assets stating their fair market value.
For instance, if you take out a loan on a car worth N3.2M and the debt on the car is N1.5M, you can increase your net worth by N1.7M.
When adding investments to your assets column, request a statement from your financial provider displaying the current market value of your portfolio, not how much it would be worth if fully vested.
Furthermore, only cash -value, life insurance plans should be listed on the asset column, not those provided by employers. This is due to the fact that they are valid for the time period that you work for in the organization.
For your liabilities, make a list of your debts and expenses, then total the amount and subtract the value from your total assets. After this process, the final figure arrived at is your net worth.
Don’t worry if you end up with a negative number i.e, your liabilities exceeding your assets. Very often, this is expected especially for persons under 40 years old because life at this stage is filled with a lot of financial commitments and interruptions, especially as women.
More so, the figure is not as important as the trend in your net worth. It only points you to where you stand and what needs to be done in terms of setting the right financial goals.
Finally, work towards a positive score by paying off debt, spending less, saving and investing more.
Dara from HerVest