Net-worth & its importance

What is personal net-worth statement?

A personal net worth statement or personal financial statement is simply your personal balance sheet. If you were a business, what would you be worth? Add up the value of all your assets (what you own), and subtract the value of your liabilities (what you owe), and that is your net worth.

Contrary to what you might think, having a net worth is not just for the rich and famous. In fact, everybody has a net worth, and you should know yours. But in order to know your net worth, you first need to understand what it is, and how it is calculated.

Your net worth is made up of 2 parts:?assets?and?liabilities.

An?asset?is anything you own outright that can provide future monetary value. Some good examples of financial assets are: the money in your bank account, any money you have invested in the stock market, real estate you own outright (e.g. the appraised value of your house minus any amount you owe on your mortgage). In its most basic form, you can think of an asset like this: if you were to sell it, the asset is worth the amount of money you would get to keep.

A?liability?is anything of monetary value that you owe to somebody else, whether that be a bank, organization, or individual. Examples of liabilities in personal finance are: your mortgage, car loans, student loans, personal loans,?credit card debt. If you owe money to anybody else, the amount you owe is a liability. Important note: a liability does not have to carry interest. If you paid for something with a loan, or a credit card that offered 0% interest, it is still a liability.

Calculating Your Net Worth

The equation for calculating your net worth is pretty simple. You just subtract the monetary value of your liabilities from the monetary value of your assets. The equation looks like this:

Net Worth = Assets – Liabilities

Is It Possible to Have a Negative Net Worth?

In short, yes, it is possible to have a negative net worth; if you have more liabilities than assets.

Advantages of calculating self-worth

1.?To get an accurate picture of your overall financial health :-?Ideally your net worth should be increasing over time. Periodically reviewing your net worth statement can help you see where your money is going. Your checking account balance doesn’t tell the whole story. You could have a growing bank account, but if you have a large amount of credit card debt or student loan debt that you aren’t paying down, your net worth could be going in the wrong direction.

2.?It helps you plan for the future :-?Knowing your net worth number is great, but having a personal net worth statement that shows exactly what kinds of assets and liabilities you have is important. For example, if you have a lot of your net worth tied up in assets that are not easily accessible (such as real estate or other long-term investments), you may decide you need to increase the cash in your emergency fund so you are prepared for short term needs.

3.?It may be required by a lender :-?In scenario where you want to avail a loan from the bank, they may ask to see a personal net worth or financial statement. Another scenario where this comes up is with college financial aid. If you applying for scholarships or other financial aid, they may want a personal net worth statement for qualification purposes.

4.?If you want to do any alternative investing :- If you want to invest in real estate, private equity, or other forms of alternative investments, there are often minimum net worth requirements.