Home Money Personal Finance How to Easily Calculate Your Net Worth?

How to Easily Calculate Your Net Worth?

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Knowing your net worth is important because it helps you know where you stand financially. It is a very essential tool for measuring your economic status and helps assess your progress every year. Many Kenyans simply gauge their economic status by how much they can spend or where they live, rather than their total net wealth.

Your net worth or your net wealth is a product of all your assets minus your liabilities. In other words, it is the figure you get when you add up everything you own that is of significance (assets i.e. home) and subtract everything you owe (debts), which may include student loans, bank loans or even mortgages.

The Net Worth Theory & It’s Importance

Theoretically, your net worth is anything of value that you own that can be converted into cash. It is the amount that remains after you have sold everything and paid all your debts i.e. Net worth = Assets – Liabilities.

Knowing your net worth will help you confront the realities of where you stand financially. Reviewing your net worth statement can help you determine:

a. Your financial standing and economic status. The net worth statements can be a wake-up call for you and can also serve as a financial scorecard.

b. Where you want to be financial. Knowing your net worth can serve as an encouragement when you are heading in the right direction i.e. paying down debt and increasing assets.

How to Calculate Your Net Worth

To calculate net worth, we need to first find the total assets and total liabilities attached to your name. This can be done as follows:

Add-up Your Assets

+ Add all you large assets. These include your house, real estate properties, vehicles, business value. Ensure they are accurate estimates of the market value in current Kenyan shilling.

+ Add all your liquid assets. These include your savings account, cash, retirement accounts and other your brokerage accounts.

+ Add all other valuable times. These include jewelry, musical instrument etc. Essentially, things worth more than Ksh. 25,000 or more should make this list.

Now,  take all these assets in the three categories (large assets, liquid assets, and valuable items), add them up and to get your Total Assets.

Add-up  Your Liabilities

+ Add all large loans. These include any bank loans for your house or car. You can also add your student loan here. List these major outstanding liabilities and their most current balances.

+ Add all smaller loans. These include m-shwari loans, family loans, credit card debts and/or any other debt you owe.

Now, add up the balances in these two sections (large and small debts) you have listed and get your Total Liabilities. 

Calculate Your Networth

You get your net-worth simply subtract your total liabilities from your total assets using the formulae below:

Net worth = Total Assets – Total Liabilities

Here is an example:

 

What Does Your Figure Mean?

Your net worth can tell you something about your financial standing:

  • A Negative Networth is an indication that you owe more than you own. While this is not an ideal situation, it does not necessarily mean that you are financially irresponsible for instance, it is very common for people who are just out college and have student loans.
  • A Postive Networth is an indication that your assets are more than your liabilities.
  • A Networth of Zero simply means that your total assets and total liabilities are equal.

Remember that your net worth is simply a starting point to have something to compare against in the future. Therefore, the number you get from this exercise, big or small, shouldn’t worry you too much. Your net worth is a moving figure and fluctuates all the time. Overall, it is best to look at the overall trend or direction of your net worth i.e. is it growing as you age –  as you pay down your debts, build equity, acquire more assets and so on.

Determining Your Target Networth

If you have no idea where your net worth ought to be, you can use the following formula to determine your target net worth:

Networth = [Your Age -25] x [ Gross Annual Income ÷ 5]

For example, a 30-year-old with a gross annual income of Ksh. 1.8M might have a net worth of Ksh. 1.8M ([30-25] x [1,800,000 ÷ 5]). This does not mean that all 30-year-olds should have this same net worth, this is just a starting point. Your ideal net worth may be higher or lower than the amount indicated in this guideline, depending on your goals, what you do for a living, salary, and lifestyle.

Getting Back On Track

For those who like to keep score, here is what you need to do to get you back on track. The success of achieving the targets on your financial scorecard heavily depends on the following:

Pay Down Debt

Paying down debt should take two steps: reducing all unnecessary spending and debt. Reducing all unnecessary spending increases the amount you have remaining to pay down your debts, and reducing debt accumulation will help keep debt levels manageable.

Save and Invest More

Your net worth figures can motivate you to save and invest. To do this, one requires spending less than they earn in order to have more income add to savings and investment accounts. If you aren’t on track with your net worth, then the net worth statement can be the psychological carrot you need to make the necessary changes to achieve your goals.

Bottom Line

When it comes to financial health, there is no magic number for net-worth you should have. It all boils down to where you really want to be. Use your net-worth to track your progress every year and hopefully, you will see it improve.

Meanwhile, If you enjoyed this, you might also enjoy these posts on financial planning:

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