Every year we write about the Malaysians who make it onto the Forbes billionaire lists based on their estimated net worth. It's a term that is often used in the context of the wealthy, but we all have personal assets that we probably never even calculated.
Here's what it is, why it matters, and how to calculate it using online resources to better understand and manage your finances.
What is a fortune?
Put simply, your net worth is the difference between who you are have (Assets) and what you owe (Liabilities). For example, your net worth includes cash and investments, any real estate you own, cars, and more. Loans, Liabilities (AP), and mortgages, on the other hand, would make up your liabilities.
Before we dive into calculating your net worth, however, it is important to first understand why you would want to do this.
What's the point of knowing?
When applying for a loan for personal or business reasons, your net worth can be important piece of information to your lender. It will give you a clear picture of your finances and how much they can get back from the sale of your assets if you default (don't repay) your loan.
Calculating your net worth also gives you an overview of your financial health in black and white. If the number is negative, it means you owe more than you own, and vice versa, if it is positive.
However, having negative net worth does not immediately mean being financially irresponsible. Instead, it just means that you have more liabilities than assets, at least for now.
Knowing all of these can be beneficial as it can make you think about what steps you can take to reduce your debt and grow your wealth. Because as with COVID-19 cases, your net worth fluctuates. However, as with the pandemic, the general trend is also important.
In theory, as you get older, your wealth will grow by paying back loan repayments, acquiring more wealth, earning higher income, and so on. However, your wealth can also decline as you age if you use your savings and investments for pension funds.
There is also no such thing as "ideal" or "healthy" wealth as it depends on each person's individual situation and financial goals. Hence, you need to set your own goals and work towards them. Knowing your net worth will give you a base to work out how much more you will need to accomplish this goal and work out your plan.
How do I calculate that?
First, get all of your financial statements in one place and list all of your asset. They contain the total amounts from:
- Checking accounts and savings accounts;
- Physical money;
- Broker and retirement accounts;
- The market value of your home;
- The value of reselling the items in your home (jewelry, electronics, furniture);
- Rental income net of real estate loans and expenses;
- Vehicles (cars, motorcycles or boats);
- Cash value of life insurance;
- Investments (stocks, bonds, mutual funds).
Then subtract the total amount of your intangible assets and liabilities, which is all of your outstanding debts, such as:
- Home loans (mortgage, home equity, line of credit);
- Car loans;
- Outstanding credit card bills;
- Student loans;
- Medical bills,
- Taxes due;
- Personal loans;
- Other bills or outstanding debts.
Once you have everything and its amounts together, you can use the formula: Net Assets = Total Assets – Total Liabilities to determine your net worth.
Which resources can help me with the calculation?
The good news is that there are online resources from MyPF, AKPK, Maybank2u, or the Malaysian Financial Planning Council to help you determine your net worth.
Of course, it is still up to you to determine the composition part yourself as you determine the amount of each asset and liability. However, it is important to use conservative estimates when assigning value to certain assets to avoid an unrealistic view of your wealth.
Unlike taxes, there is no hard and fast rule about how often you should calculate your wealth. Remember, the goal of tracking is not that you maintain high net worth at all times. Rather, it is about making sure you are on track to meet your short term and long term financial goals, whether you are buying a home, a car, or starting a business.
Other data points that actually give you more actionable information are yours Credit score (shows how well you handle borrowed money) Debt-Income Ratio (shows how financially you are burdened by the amount of your monthly income to cover your debts) and yours Retirement plan score (shows your future lifestyle standards based on your current age, salary and retirement savings)
- More articles we've written on money management can be found here.
Selected image source: Robert Kuok from SCMP / Ananda Krishnan via Wikipedia