For companies this is defined as total assets less total liabilities, and it shows what the equity in the business is worth.
To translate this into your own finances means determining what your financial worth is net of the loans. Let's say you have liquid investments, including fixed deposits and mutual funds, worth Rs.20 lakh, provident fund worth Rs.5 lakh and the house you live in is worth Rs.1 crore. On the other side of this personal balance sheet is a Rs.60-lakh (principal remaining) loan you have taken for the house, Rs.30,000 current outstanding on a credit card and a Rs.6-lakh (principal remaining) car loan. Your net worth is the difference in the total sum on both sides-Rs.58,70,000.
Is this enough? That depends on your age, income and future financial commitments.
Net worth is usually a part of financial plans. It's an indicator of how funds are allocated. He suggests looking at net worth with and without the value of the residential house as the house can't be counted for future financial goal setting.
Tracking your net worth allows better investment choices. If age is on your side, a high current net worth gives you enough room to take on riskier investments. A low net worth could restrict you to assured income investments.
Assets, liabilities and net worth are important factors as they define the risk-taking ability. If one has more loans, it increases overall risk and should ideally translate into a more conservative investment strategy. This is especially true to guard against a recessionary environment. In 2008, for example, investors who were over-leveraged found not only the value of their market-linked investments going down, but the value of leveraged assets, including properties, fell alike and their equated monthly instalments (EMIs) increased with rising interest rates.
What gets included in net worth also needs careful attention.
For many people, 70-80% of the net worth is in real estate, but this is not liquid. Moreover, the house we stay in is usually the costliest investment. It would be better to have a more balanced net worth, which can be utilised to enhance wealth
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