One reason why most people are not achieving their financial goals is lack of proper planning and management. Like any other serious goal, financial success requires proper controls and self-discipline. One of the key step in financial planning is the calculation of personal financial net worth as at a particular point say 31 December xxxx.
Financial net worth shows your wealth position as at a particular date. It is similar to the balance sheet for companies. A net worth statement can be useful in supporting personal or small business loan applications, and more importantly for personal investment planning and management purposes. The statement is very important for sole traders and partners whose liabilities are usually not separated from that of their businesses.
What is Personal net worth ?
It is the value of assets a person owned minus liabilities he/she owed. In simple term, it is the total personal assets minus the liabilities. As the saying goes, you never know how to get somewhere unless you know where you are right now. Financial net worth statement helps you see the financial run rate between your position and your financial goals. These goals may include buying house, funding educational cost, buying a new car, retirement funds or to join the millionaire den.
How to Calculate Personal net worth
You only need some basic financial information about your assets and liabilities to calculate your personal net worth. It’s a pretty simple process for most individuals.
1. List all your assets
To determine your net worth, the first step is to take a list at all the valuable assets you owned. Assets may include:
- Cash and bank balances –cash in your hand and the balance in your savings, current, or call accounts. These are mostly very liquid assets.
- Investment – Investment includes your quoted and unquoted shares, bonds, Treasury bill, private placement, mutual funds etc. They are usually recorded at their market value.
- Pension funds– include your private and statutory pension contributions balances.
- Motor Vehicles – the current value of your cars. You can use expert valuation or the accountants’ net book values.
- Properties – the current market value of your properties (house, land, etc.). You can engage a valuation expert or use the total cost approach with accounting depreciation. The key point is to be consistent and reasonable with the valuation method.
- Personal Valuables – including the market value of other valuables e.g. artworks.
- Other receivables – If you reasonably believe the person will pay you; then add them to your assets. Only include assets that have value.
2. List all your liabilities
When you’re done listing assets, make a separate list of liabilities with their values. Liabilities are any debts or payments you owe to someone else. Here are the most common examples:
- Mortgage – the outstanding balance (principal and accrued interest) to pay on your mortgage loan.
- Car loan – the balance on your car or auto loans.
- Personal loans – the balance on other loans. It is important to note that the loans should be recorded as outstanding balance plus any accrued interest and fees as at the statement date.
- Credit card debt – any outstanding balance owed on your credit card(s).
- Other payable – This may include tax, outstanding bills and payable to others people.
3. Net worth = total assets minus total liabilities:
Now that you’ve gathered all the information about your assets and liabilities, simply find a grand total of the assets and a grand total of the liabilities. Finally, subtract the total liabilities from the total assets; yes this is your net worth. For example if the total assets are N62,500 and the total liabilities are N22,000 your net worth will be N40,500.00 (N62,500-N22,000).
Your net worth could be negative or positive depending on whether you have more assets compared to debts or otherwise.
However, whether you have a positive or negative net worth, it’s important to do a proper financial management for you to achieve your financial goals. Imagine a person who worked for 10 years with an average salary of N600,000 per annum, however his financial net worth is still less than N500,000.00
Above all, it is important to repeat this process at least once a year and compare it with the previous numbers. This will help you determine if you are making progress or getting further behind.
Remember It does not matter whether you are an executive or a student; your financial planning and discipline determines your financial success.