Why must you calculate your net worth from time to time?
Net worth is a great insight into your financial standing. It is essentially the difference between what you own (assets) and what you owe (liabilities). Assets include your income, investments, home, etc., while liabilities include loans, credit card bills, taxes due, and more. Knowing your net worth is important because it helps in several ways to financially plan for a secure future.
Reasons to calculate your net worth periodically
- Allows for a debt management plan
When you are aware of your net worth and all your liabilities, you can come up with an effective plan to manage and repay your debt. For instance, you can focus on first repaying all high-interest loans such as personal loans and credit card bills to save on interest outgo. This can only happen if you calculate your net worth from time to time and are aware of all the loans you have, the Equated Monthly Instalments (EMIs) left, etc.
- Helps prioritise the utilisation of your funds
If you have surplus funds, knowing your net worth can help you utilise them in the most optimum manner. For instance, if you look at your investments such as a short-term debt mutual fund and realise you are only earning about 3% returns while you have a personal loan on which you are paying 15% interest, then you could see that using your surplus funds towards paying the personal loan would be significantly more beneficial than investing in that debt fund.
- Keeps spending in check
It’s easy to spend money on things you don’t need and drain your savings. When you calculate your net worth periodically, you can see areas where you are unnecessarily spending too much money and cut down on that. Knowing your net worth can also guide you in knowing what goals you want to build wealth for such as buying a second home, retiring early, etc. So, you can use your money towards such long-term goals instead of having a lavish monthly budget.
How to calculate your net worth?
You could make a list of all your assets and liabilities and calculate your net worth manually. However, that could be a tedious and tricky task. A quicker, more efficient way to do this is to use a net worth calculator online.
A net worth calculator is a free, helpful tool offered by some of the best mutual fund houses in the country. You simply have to enter details such as your income, assets, loans, etc., and within a few seconds, the net worth calculator will show you an accurate result.
How often should you calculate your net worth?
There is no one right answer for this. How often you should calculate your net worth depends on your financial profile and preference. You could choose to do so quarterly, bi-annually, or annually, though annually suffices for most people. Another example where you should recalculate your net worth is when you make a major purchase or sell a major asset like a house.