Wananchi Opinion: This is how to calculate your net worth

Personal Net worth is the value of assets an individual owns minus the liabilities he owes.

Assets include everything you own that has monetary value, such as cash, investments, real estate, and personal property.

Liabilities, on the other hand, are your financial obligations, such as loans, mortgages, credit card balances, and other debts.

The term “net worth” is used in the financial world to qualify certain individuals for particular investment strategies or financial products such as hedge funds, structured products, or other complex or alternative investments.

Net worth is sometimes referred to as net wealth.In a nut shell, Net worth = assets – liabilities.

Net worth can be described as either positive or negative. Positive net worth means that assets exceed liabilities.

Negative net worth indicates that liabilities exceed assets. Positive and increasing net worth indicates good financial health.

Decreasing net worth is cause for concern because it might signal a decrease in assets relative to liabilities.

The best way to improve net worth is to either reduce liabilities while assets stay constant or increase assets while liabilities either stay constant or fall.

Net worth can be applied to individuals, companies, sectors, and even countries.

What is Net Worth in Personal Finance? An individual’s net worth is the value that’s left after subtracting liabilities from assets.

Liabilities include debts like mortgages, credit card balances, student loans, and car loans. Liabilities can also include obligations such as bills and taxes that must be paid.

An individual’s assets can include checking and savings account balances, the value of securities such as stocks or bonds, real property value, and the market value of an automobile.

The net worth is whatever is left after selling all assets and paying off personal debt.

People with substantial net worth are known as high-net-worth individuals (HNWIs). They form the prime market for wealth managers and investment counsellors.

Knowledge of your individual net worth is of critical importance because whether you’re a high earner looking to build wealth or someone who has already accumulated assets, knowing your net worth provides valuable insight for your continued financial journey:

Financial awareness. Calculating your net worth provides a clear snapshot of your current financial situation.

For some, it can provide a sense of security to know that their financial picture is more than just one balance in one investment account.

For others, especially those with high incomes yet high debt, this exercise can remind them to prioritize long-term goals over comparison or lifestyle creep.

Goal setting. By assessing your current financial position, you can begin to see where you want to make changes to affect either side of the net worth equation—either increasing total assets through investing or decreasing your liabilities by paying down debt.

Debt management. As you look at the liability side of your net worth equation, it will become clear which debts are having the highest impact on your overall finances.

This can help you prioritize debt repayment and develop a strategy to reduce your loan balances over time and move into a positive net worth and wealth building phase of your life.

Cash flow management. Many high-income earners express frustration that they make too much to feel as financially unorganized and strained as they do.

Often, this is because they do not truly understand how their debt and assets balance in their net worth. By analysing your assets and liabilities, you can identify areas where cash outflows exceed inflows, pinpointing payments that are draining your account.

This awareness allows you to prioritize expenses, cut unnecessary costs, and reallocate funds towards savings or investments.

Asset allocation. The key to successful investment is balancing risk and reward by diversifying where you hold your assets.

When you list out all your asset holdings to calculate your net worth, you may discover some areas are weightier than others.

Your financial advisor could recommend reallocating some of your wealth to mitigate against market risks or tax liabilities down the road, both of which can erode your net returns or impact distribution in retirement or estate planning.

Estate planning. Knowing your net worth is the crucial first step for estate planning purposes. Even for those who don’t think they own enough to warrant a proper estate plan; a net worth summary can reveal notable assets that should be accounted for in your passing.

Additionally, if you do have a more sizeable estate, understanding the full picture of both the assets and liabilities in your finances can help you parse out the complexity of your situation.

Then, you and your financial advisor, in coordination with your estate planning attorney, can determine how your assets will be distributed upon your death and ensure your beneficiaries are taken care of according to your wishes.

Mr. Abol Kings is a financial coach, a teacher and a former banker.