The Importance Of Calculating Your Net Worth

As investors, we tend to pore over the financial statements of a company. We look at the income statement, the balance sheet, and the cash flow statement in order to understand the company’s finances. However, we also shouldn’t forget to take a look at our own financial statements once in a while.

When we invest our money in order to let our money work for us and create more wealth for our family, the profits from our investments generally relate to our income and cash flow statements. Many investors seldom take stock regarding the current status of their balance sheet on a regular basis. Yet, knowing our current balance sheet status is an important step as an investor. It helps us to understand what our current net worth is. Is it growing or shrinking? How much are we exposed in each asset class? Are we buying a house that we cannot afford? Are we investing enough? All these questions can be answered if we know the current status of our personal balance sheet.

So how do we calculate our net worth?

It depends on how detailed you want your balance sheet to be. For me personally, I typically just take a rough estimation on the balance sheet instead of writing down every single thing that I own. You can use a different approach, but this is how I do it and it can be a good starting point to calculate your own net worth.

You can use a simple Excel sheet to tabulate your balance sheet or make use of some of the free accounting software available online. You can start with writing down the major items that you possess; car, house, cash, shares and other valuables. Then, you can include all your liabilities in your life, your mortgage, car loan, student loan, personal loan, credit card debt and other possible liabilities. You can choose to link up each loan to the particular asset so as to give you a better idea of whether the loan has an asset to back it up or is purely a liability for you. For example, your mortgage (liability) is linked to your house (asset), in such a case, the liability is not a very serious threat as you have a strong asset to back it up. However, if you have a large credit card debt, the liability is not backed by any asset, which mean that the liability is quite damaging to your overall balance sheet.

Lastly, net off all your assets with your liabilities, and it will give you your current net worth. Now you have calculated your net worth, you can analyse your own balance sheet the same way you analyse the balance sheet of a company. You can see what portion of your asset is your house, how much of your net worth is invested in the stock market, and what is your leverage ratio is. All these questions can be answered and it will allow you to have a much better sense of your finances.

Foolish Take

It is important because the first step to reaching your personal financial goals is to understand where you are starting from. Once you know where you are and where you need to go, you can plan and check on your progress at regular intervals to see how you are progressing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.