How to calculate your Net Worth & why it’s so important….

All of us should know our net worth and not just the business tycoons and high profile CXOs. Net worth is the amount by which assets exceed liabilities. It can be used to determine the financial worth of an individual or a business. Net worth is a great parameter to measure your financial standing. It is important to calculate your net worth so that you are aware of where you are in the financial journey and know what you need to do to achieve your financial goals.

how to calculate net worth

How should you calculate your net worth –

Arithmetically,

Net worth = Assets- Liabilities

  1. List down all your assets. This should include bank balances, bonds, Equity investments, MF investments, property, PPF/EPF etc. Make a conservative estimate of the assets’ value.
  2. List down your liabilities. This includes all balance left in all loans like Home loans, credit card loans, personal loans, outstanding premiums etc.
  3. Find the difference. The difference is your net worth. When you are younger you might have  a negative net worth due to education loans or home loan amount outstanding being very big. You need not panic but take steps to ensure that you aim towards reaching  a positive net worth asap.

Net Worth – Thumb Rule

There is also a thumb rule for how much should your net worth be (minimum).

If you are employed, net worth should be

{(Age*Annual Household Income)/10} – Inheritances

If you are not employed or a student or just started working, your net worth should be

{((Age-27)*Annual Household Income)/10} – Inheritances

Why is net worth important?

Net worth is a snapshot of everything you own and everything you owe. It is important to know your net worth as you are aware of your financial health. Net worth should be calculated at least once a year so that you know the trend your finances are following.

If your net worth is high, you will be able to achieve your financial goals and you will be financially secure and you can live your life the way you want without constantly worrying about how every decision affects your finances.

How do I increase my net worth?

You should always try to improve your net worth. It requires some work, willpower and discipline. Here is some guidance –

  • Reduce your Debts – You should pay off your debts as and when you can and it makes financial sense. You should avoid taking loans for consumption and personal loans. Revisit your loans once in a while to see if you can change the terms and conditions. Check if you can prepay the debt or pay a bigger EMI to save money.
  • Make smart investments – Asset allocation is very important. It is not a smart idea to leave your money lying idle in the bank. Invest in a variety of assets like Equity Funds, Property, Debt Funds etc. so that your finances grow and you are hedged against risks if any of the assets lose value. If you are not sure on how to diversify your assets, talk to a professional/ financial planner.
  • Reduce Expenses and Increase Savings – Keep a check on your expenses. You can list your daily expenses in a diary to start with. Do you eat out a lot? Are you always buying new clothes and shoes? Are you the first one to buy the latest smartphone or tablet in the market? Analysing your expenses can help you find out your bad spending habits and take steps to curb them. You need not give up everything you like but a little self-control goes a long way in increasing your savings and ultimately net worth. You can save money by controlling your  expenditure and making smart choices in your lifestyle.

I have added Net Worth & lots of other calculators in my book

“Financial Life Planning”

Do you know your net worth? How often do you calculate your net worth? Do share your tips on how to increase net worth.

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{ 8 comments… add one }
  • Sundar Chaterji July 8, 2014, 5:31 PM

    Thanks for a very useful piece, Hemant. How do you categorise high, medium, low net worth? Who are HNI- s? And should these categories be absolute or should they vary with age, earning potential, future liabilities etc? Would be nice to hear.

  • vinit July 9, 2014, 9:00 AM

    Please explain Inheritances

  • dr nitin July 9, 2014, 1:35 PM

    hello mr hemant..

    a very useful article again..according to formula u have given, minimum increase in net worth every year should be 10 percent of annual household income..

    in case, both me and my wife are earning and our income adds to household, how can we calculate our net worth individually..

  • chellamani July 10, 2014, 7:24 PM

    dear mr. hemant,

    nice to see this post. but i have some doubts on the formula. suppose someone has an annual income of rs. 10 lakhs and is aged 40, then the net worth works out to just rs. 40 lakhs which will hardly give an adequate income to live his retired life. would be thankful for your inputs and clarifications…

    thanks

    chellamani

  • Arun July 12, 2014, 2:34 PM

    This thumb rule is from the book ‘The Millionaire Next Door’ by Stanley & Denko. Though its a good rule to check if you are in the right track, I am skeptical as to whether this formula applies to Indian audience. Anyways, PAW, UAW and AAW are interesting concepts..

  • Veerendra Darakh July 20, 2014, 11:25 PM

    To continue with this topic pls suggest a good online portfolio manager which shows our daily net worth of our investments.

    I invest only in mutual funds.

    Thanks in advance,

    Veerendra Darakh

  • Rishika Ahluwalia December 2, 2016, 5:12 PM

    Is any parameter which states the degree of someone’s net worth? How will someone whether their net worth is high, medium or low?

  • Sanjay Sinha December 7, 2016, 4:14 PM

    Dear Rishika

    To categories high, medium & low net worth you have to calculate your net worth by arithmetically & thumb rule formulas. If net worth (Arithmetically formula) is higher then net worth (Thumb rule) then it will be considered as high category.

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