One question that keeps returning to the mind very often is- “How am I doing on my Financial Front ?”. We then total up all that we have in the form of cash balance, investments, property etc. and try to derive a sense of comfort. But mostly there remains a lingering doubt as to whether or not it is enough. While there are several methods to measure the Net Worth, the meaning of the results would be very contextual to the individual.
How to Measure Net Worth
The simple method to measure Net Worth is to total up all assets and subtract the liabilities. The balance is what can be termed as the Net Worth. The table below would further help understand the calculation.
| Asset | Value Rs (lakhs) | Liability | Value Rs (Lakhs) |
| Property | 60 | Unpaid Home Loan | 25 |
| Cash, Savings & Deposits | 6 | Outstanding Car Loan | 3 |
| Mutual Funds/Stocks | 15 | Credit Card Bills | 1 |
| Provident Fund/Bonds | 25 | ||
| Gold | 2 | ||
| Car | 4 | ||
| Other Valuables | 3 | ||
| Total | 115 | 29 | |
| Net Worth | 76 |
So, it might seem simple, but still lacks some meaningful sense, as Rs 76 lakh might mean different to different people. Further the effect of assets and liabilities will also be different. Many assets might not be valued easily, and some would not be meant for disposal like residential house. Including such assets in Net Worth can give a false sense of financial assurance. You may not be having any current liability, but the current assets might be meant for some planned financial objective. Excluding such future liabilities would leave a doubt over the calculated Net Worth.
Meaningful Net Worth
To arrive at a meaningful Net Worth, all those assets which are not intended to be liquidated should be kept out of the calculation. Any property earmarked for self-occupation should therefore be excluded. What we can include is the property other than for own residential use, cash, deposits, financial instruments and high value possessions. The future liabilities so calculated should also be assessed at their present cost, and adjusted against assets to arrive at a more reasonable Net Worth. I think this method would be able to give me some more confidence in my Net Worth so arrived.
What Does Net Worth Indicate
Net Worth generally gives a measure of wealth. But apart from getting at some figures, the Net Worth should more importantly be assessed to get qualitative inputs into own financial health. What one is looking at is some sense of security and financial wellness in present and future times. When evaluated in individual context, the same figure would give different feeling to different persons. Robert Kiyosaki in his book “ Rich Dad Poor Dad” has given another measure of wealth in terms of time. According to him wealth should be measured in terms of time, I.e. duration up to which it will help us survive in absence of any other source of income. If my monthly expenses are Rs 50,000/- and my Net Worth is Rs 30 lakh, then I have wealth enough to last me for 60 months, or 5 years. It can be a little different if we factor the returns from this amount and inflation over this period.
How Much Net Worth Should I aim for ?
While everyone desires to accumulate as much wealth as possible, it might be interesting to find out the minimum requirement. This as I mentioned earlier would again be very contextual. One should have enough assets which can generate adequate cash flows to cater for the expenses. As every individual has different expenses and varying incomes, this requirement will be different. Till such time the Net worth is lesser, one is likely to remain financially vulnerable. The growth in net worth however takes time, as both the income and expenses keep changing with different stages of life. Further we have to guard against Lifestyle Inflation which has a serious potential to disrupt and delay the attainment of minimum required Net Worth.
How am I Doing?
Very few people are able to attain financial freedom early in life, and then retain it. Balance live with some ambiguity till later stages when the liabilities would have significantly diminished, and assets would be largely unencumbered. Undoubtedly what contributes most towards building Net Worth is the accumulated Savings which is the sum total of all savings/deposits and other investments. Further it is a direct function of the income and expenditure. One barometer to assess if one is doing well is to check if the savings are commensurate to the income. In the early 40s, the accumulated savings should be at least three times the annual income. What one should aim for is to attain Critical Mass when there won’t be any more need to further save. The pace of increase in cash inflows from accumulated assets should be more than the pace of increase in expenses.
Recommendations
What can be done to improve the Net Worth situation in terms of value and time
- Try to decrease expenses and improve savings in the initial years of earning, and let accumulated savings benefit from the Power of Compounding.
- Defer discretionary liabilities till such time the overall Net Worth improves.
- Diversify assets appropriately to achieve a balanced growth of Net Worth.
- Work out your Critical Mass requirement and set it as your Net Worth objective.