June 11, 2018
We are sure you have heard of the term ‘net worth’ at least once, especially when Forbes magazine announces their Richest List disclosing net worth of the world’s billionaires. The interesting thing is, regular people like you and I have net worth too! And you should know your net worth as it’s a snapshot of your financial health and an important part of a sound retirement plan.
The simplest way to describe net worth is the difference between what you own and what you owe – your assets minus your debts.
To do this, you will need to list down your total assets value which include:
Then, you will also need to list down your total debts including:
By doing this simple audit and calculation of your finances on an annual basis, you will be able to appraise yourself like the rich and focus on increasing your net worth instead of just making sure you have enough cash to survive on a monthly basis.
To achieve your financial goals, and whether you’re on track, you need to find out your net worth so you can determine if you’re financially fit. If you have a negative net worth, then it’s a red flag for you to take steps in clearing your debts such as debt consolidation with a personal loan or a credit card balance transfer plan.
See Also: 3 Debt Repayment Tools To Use This Year
By listing down your debts, especially big-ticket items such as a car loan or house loan, you will able to identify if you are overwhelming yourself with too many expenses. This is also a good time to go into details of your spending especially on your credit card and make healthy adjustments to achieve a higher net worth.
By knowing how much your net worth is today, you can easily set the targeted net worth you want to achieve over the next 5 or 10 years by managing your assets (cash, savings, investments & income-generating assets) as well as your debts carefully.
Our advice? Be careful when taking on a new loan and make sure your debt service ratio does not exceed 50%, which is the safety limit set by the government agency, Agensi Kaunseling & Pengurusan Kredit (AKPK). For those who do not know what is a debt service ratio, read this!
In addition to that, you should try your best to focus on investing your money in assets that generate income. While you may think that buying a property is a good investment, it could actually be a liability given that you are paying off the mortgage every month. Property is only considered an asset once it manages to generate income that covers or is higher than your monthly mortgage repayment.
Here are some guides for you to learn about investing in stocks & unit trusts:
In a way, managing your net worth is similar to managing a company’s income statement and balance sheet. The bottom line is, make sure your income/assets value is higher than your debts/liability.