Before building a financial plan, an individual needs to be aware of his net worth, the difference between the assets he owns and the liabilities he owes. This helps him to adequately route his money in a manner that provides him with liquidity, a stable financial state and control on the liabilities.
On a broader framework, assets include a house and land, vehicles, cash, stocks and mutual funds, provident fund, gold, art, payout value of the insurance policies at present value, consumer durables and any other valuable assets that one has.
Depreciation on vehicles and consumer durables has to be considered while calculating the fair market value.
The liabilities include total outstanding on home loan, vehicles and consumer durables. It also includes outstanding on credit cards and other loans that you have.
The difference between assets and liabilities make the networth and that should be positive and growing in order to make an individual financially strong and stable. The net worth is a useful tool to measure the financial progress every year. It also tells you the amount of liquidity present in the assets built.
“The net worth lets you know whether you have enough liquid assets and also helps you calculate your debt-equity ratio,” said Amar Pandit, Mumbai based financial planner.
Experts say that most people are asset rich but income poor. Hence, while individuals should look to built assets other than their home they should built assets with an eye on liquidity at hand.
“At least 25 per cent of the income should go towards creating assets and about 20 per cent of the assets should be liquid assets,” said Pandit.
Individuals should keep in mind that initially at young age, towards the building of the family, the net worth is stretched and it should keep on growing from there.
The net worth also makes the individual aware of any mismatch in the interest rate on his assets and liabilities. In case the interest rate paid on liabilities is higher than what is being earned on the investments then the person should pay off the debts by breaking those assets.
The net worth status needs to be revisited every year so as to check your performance against the previous benchmark. In case you are getting behind revisit your plan.