How To Calculate Personal Net Worth & Online Tools That Help
Every year, we write about the Malaysians who are on Forbes’ Billionaire Lists based on their estimated net worth. It’s a term that seems to come up often in the context of the wealthy, but we all have personal net worth that we’ve probably never calculated.
Here, we’ll describe what it is, why it’s important, and how you can calculate it with online resources to better understand and manage your finances.
What is net worth?
Simply put, your net worth is the difference between what you clean (assets) and what you duty (Passives). Your assets include cash and investments, any real estate you own, cars and more, for example. On the other hand, loans, accounts payable (AP) and mortgages would be your liabilities.
But before you get into calculating your net worth, it’s important to first understand why you would want to do it.
What’s the point of knowing it?
If you are applying for a loan, whether for personal or business reasons, your net worth can be important information for your lender. It gives them an accurate view of your finances and how much they can get back after selling your assets if you fail to repay your loan.
Calculating your net worth also gives you insight into your financial health in black and white. Say if the number is negative, it means you owe more than you own, and vice versa if it is positive.
But having negative net worth doesn’t immediately equate to being financially irresponsible. Instead, it just means you have more liabilities than assets, at least for now.
Knowing all of this can be beneficial, as it can inspire you to think about what actions you can take to reduce your debt and grow your assets. Because like in COVID-19 cases, your net worth will fluctuate. However, just like the pandemic, it is the general trend that is important.
In theory, your net worth will increase as you age through settling loan payments, acquiring more assets, earning more income, etc. However, your net worth can also decline as you get older when you start to dip into your savings and investments for retirement funds.
There is also no such thing as an “ideal” or “healthy” net worth as it depends on each person’s unique circumstances and financial goal. Therefore, you will have to determine your own goals and work on them. Knowing your net worth gives you a baseline for determining how much more you’ll need to reach that goal and allows you to set your plan.
So how can I calculate it?
First, compile all of your financials in one place and list your total asset value. They include the total amounts of:
- Checking and savings accounts;
- Physical money;
- Brokerage and retirement accounts;
- The market value of your home;
- The value of items resalable in your home (jewelry, electronics, furniture);
- Rental income after deduction of the mortgage and costs;
- Vehicles (cars, motorcycles or boats);
- Cash surrender value of life insurance;
- Investments (stocks, bonds, unit trust).
Next, deduct the total amount of your intangible assets and liabilities, which is all of your unpaid debts, such as:
- Home loans (mortgage, home equity loan, line of credit);
- Auto loans;
- Unpaid credit card bills;
- Student loans;
- Medical bills,
- Taxes due;
- Personal loans;
- Other invoices or unpaid debt.
Once you have everything compiled and its amounts, you can use the formula: Net worth = Total assets – Total liabilities to determine your net worth.
What resources can help me calculate it?
The good news is that there are online resources from MyPF, AKPK, Maybank2u, or the Malaysian Financial Planning Council to help you determine your net worth.
Of course, the compilation part is always up to you to determine yourself when determining the amount of each asset and liability. However, it is important to make conservative estimates when assigning a value to certain assets to avoid having an unrealistic view of your wealth.
Unlike taxes, there is no set rule on how often you should calculate your net worth. Keep in mind that the goal of following it isn’t to maintain high net worth all the time. Rather, it’s about making sure you’re on track to meet your short- and long-term financial goals, whether it’s buying a house, a car, or starting a business.
Other data points that actually give you more actionable information include your credit score (shows how well you manage the borrowed money), debt to income ratio (shows how much you are financially strained compared to the portion of your monthly income that goes towards what you owe), and your retirement savings score (indicates your future lifestyle standards based on your current age, salary, and retirement savings)
- You can read other articles we’ve written on money management here.
Featured Image Credit: Robert Kuok by SCMP / Ananda Krishnan via Wikipedia
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