Net Worth is simply the difference between the total of all assets you own – the total amount of liabilities (loans, etc).
No matter how much (or less) you know about investments, stock markets, credit cards and insurance, if you do not know your money well, you are most likely to fail with in planning financially.
The first and perhaps the most important step in financial planning is to know your money i.e., your financial position well and then be able to manage it wisely.
What makes up your financial position or Net Worth ?
Your income and expenses: What you earn and how much you spend determines how much money you have on hand after meeting your needs (and some wants). This ‘balance’ is an important indicator of your financial position.
It can be used as a guideline to plan your finances.
A healthy positive balance every month indicates a trend towards a good financial position and a zero or negative balance most of the months corresponds to a weak financial trend (especially if you are not building assets on the way).
A healthy positive balance from your income will allow you to build funds for meeting your financial goals. Below mentioned is a sample of what you need to have:
Sample outcome of cash flow analysis
|Net Salary Income (Salary)||Rs. 13,20,000 p.a.|
|Partner’s Net Salary Income (Salary)||Rs. 10,20,000 p.a.|
|Total Income:||Rs. 23,40,000 p.a.|
|Living Expenses||Rs. 9,00,000 p.a.|
|Total Expenses:||Rs. 9,00,000 p.a.|
|Regular Savings (MF SIP)
into Mutual Fund Savings/SIP (Mutual funds)
|Rs. 1,20,000 p.a.|
|Total Committed Savings:||Rs. 1,20,000 p.a.|
|Regular Repayment (Home loan)
into Housing Loan
|Rs. 7,80,000 p.a.|
into Car Loan
|Rs. 84,000 p.a.|
|Total Repayments:||Rs. 8,64,000 p.a.|
|Total Income:||Rs. 23,40,000 p.a.|
|Total Expenses:||Rs. 18,84,000 p.a.|
|Net Cash Flow:||Rs. 4,56,000 p.a.|
Your assets and liabilities: The amount of assets—items of value—you hold, is a precise indicator of your current and future financial position. Assets tend to add to your income (either now or in future) e.g., investments—in gold/silver, deposits, stocks, mutual funds, art/antique, land etc.
Or they help reduce expenses, as in case of owning a house—it saves you taxes and rent. Thus, assets help to strengthen your financial position. On the other hand, liabilities weaken your financial position.
Debt—something that you owe is a liability. And so is an old vehicle that needs a lot of fuel and repairs, for the work it is doing.
More assets and lesser liabilities would help you better your financial position and strengthen your money.
Sample Statement of Position or Net Worth
|Cash in Hand (Bank balance)||Rs. 3,00,000|
|Fixed Deposit (Bank FD)||Rs. 9,00,000|
|Mutual Fund Savings/SIP (Mutual funds)||Rs. 5,00,000|
|Public Provident Fund (PPF)||Rs. 10,00,000|
|Employee Provident Scheme (EPF)||Rs. 15,00,000|
|Partner’s Employee Provident Scheme (EPF)||Rs. 8,75,000|
|Total Investments:||Rs. 50,75,000|
|Other Assets||Current Valuation|
|Residential Property||Rs. 1,00,00,000|
|Car / Two Wheeler||Rs. 4,50,000|
|Total Other Assets:||Rs. 1,04,50,000|
|Credit Card (Citi)||Rs. 45,000|
|Housing Loan||Rs. 65,00,000|
|Car Loan||Rs. 3,45,000|
|Total Liabilities:||Rs. 68,90,000|
|Total Assets:||Rs. 1,55,25,000|
|Net Worth:||Rs. 86,35,000|
Just like any disease is best treated when detected in an early stage, similarly with regard to your financial health recognizing early signs can help you take right steps and prevent great disasters for yourself.
The key aim of your investment objective should be to increase your Net Worth year on year.