The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "Be careful about reading health books. Some fine day you’ll die of a misprint." ~ Markus Herz

Is your Net Worth positive or negative?

Your personal Net Worth is the net monetary value of your financial / material possessions and obligations. The formula to calculate Net Worth is pretty easy and undemanding.

Net Worth = Assets - Liabilities  
where
- Assets are your possessions
- Liabilities are your obligations

If your assets exceed the liabilities, you have a +ve Net Worth.
And when your liabilities surpass your assets, your Net Worth becomes -ve.

The definition of Assets and Liabilities may look quite simple and straightforward. However, in financial context there is catch; especially where your assets are concerned.

Let us look at the Liabilities first i.e. where you owe something to someone and hence a "pay-out" is involved. These will include:
- Home loans, car loans, personal loans, etc.
- Credit card outstanding
- Moneys borrowed from friend / relatives
- Unpaid bills
- Any other financial commitments

Coming to the Assets i.e something you own. Now, there can be two types of assets, viz.
Type 1: Assets that appreciate i.e. they make money for you. Or, in other words, a "pay-in" is involved. For example,
- Bonds, Fixed Deposits, Bank balance, Cash
- EPF / PPF/ Superannuation / Gratuity
- Property
- Gold, Silver
- Mutual Funds, Shares
- Life Insurance Policies
- Money lent

Type 2: Assets that depreciate and need maintenance i.e. those which lose value with time and also you need money to use / maintain them, for example
- Car / Two-wheeler
- Plasma / Big LED TVs
- Designer dresses

Most people include the Type 2 assets also in their Net Worth . But, due to depreciation / maintenance, these assets result in "outflow" of money and decrease your net worth.

Therefore, from financial perspective, it is advisable not to include such assets in your Net Worth calculations. Also, in percentage terms the outflow on account of these assets is generally small when compared to the normal Liabilities. So, you need not include them in your Liabilities too. 

In short, just ignore them from the Net Worth calculations. 

In fact, I would go to the extent of suggesting that you don't include your primary residence too in your Net Worth, since a roof over one's head a fundamental need.

So now that you know how to compute your financial Net Worth, work out whether you are in the plus or are living dangerously.

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