Your financial net worth is the difference between your assets and liabilities. Your assets are the things you own which go up in value or generate income. Typical assets include cash and cash equivalents, unit trusts, treasury bills and bonds, vehicles, equipment, investments, land, shares, buildings, businesses, etc. Liabilities include the money you owe to other people. For example, salary loans, business loans, credit card loans, credit, mortgages, etc.
Calculating your net worth can reveal many things. The net worth maybe positive which is a good thing. This implies that you have more assets than liabilities. It maybe negative which means you’re technically bankrupt because your liabilities exceed your assets. It may be zero if your assets are equal to the liabilities. The net worth may also reveal your risk exposure and liquidity status. If you have too much debt it means you are highly leveraged and have too much risk exposure. What you want is to limit debt exposure as much as you can. If you have little cash it means you have low liquidity and may struggle to meet day to day expenses. Ideally you want to have cash reserves to last you at least six months.
Tracking your net worth over a period of time will also reveal your level of diversification per asset class and the progress you’re making toward your financial goals. You want to achieve a good level of diversification to mitigate the risk of loss in any asset category. You also want your networth to grow over time as you save and invest. You should also track how much income your net worth is generating. This figure should compare favorably with what you would earn in a simple money market fund.
It’s pointless to try and compare our net worth with other people. We are all on different life trajectories and face different challenges every day. You should only gauge whether you’re making progress on your financial goals or not. Comparing yourself to other people is a sure way to unhappiness and dissatisfaction.
In conclusion, computing and tracking your net worth will create a lot of awareness in your financial life and it’s critical to improving your financial well-being.
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