It is said that money cannot buy happiness. While this statement may be true, it is equally correct to say that money can definitely buy things which can make us happy.
Rather than the money, the very belief itself that one has enough money to take care of his needs and goals is what makes one worry-free.
A crucial step towards developing this belief is knowing your net worth. In simple words, net worth is the sum of all the financial assets and non-financial owned by an individual or an organization minus any outstanding liabilities.
A high net worth implies good financial strength whereas as low net worth means weak financial strength.
Steps to calculate your net worth
Step 1: Make a note of all your assets
Your assets include your bank balances (savings/fixed/current), bonds, stocks, mutual funds, vehicles, jewellery, real estate, cash value of life insurance policies and other investments such as PPF/EPF etc.
Step 2: Make a note of all your liabilities
Your liabilities include all outstanding payments left in all loans like home loans, vehicle loans, personal loans, outstanding credit card dues etc.
Step 3: Deduct the total amount of liabilities from your assets
The difference you get after deducting your liabilities from your assets is your net worth.
Once you evaluate and understand your net worth, it is important to take some positive steps to increase it.
How to increase your net worth?
The below-mentioned steps can help you in increasing your net worth:
Eliminate your debts
Reducing or eliminating your debt completely is a great way to improve your net worth. When you have outstanding loan EMI’s to pay every month, it eats away a significant chunk of your monthly income, leaving you with less money in hand to invest and grow your money. Whenever possible, use your yearly bonus or pay hike to prepay part of your debt or foreclosing a loan.
Avoid unnecessary expenses
Evaluation of your expenses can help you keep a tab on your spending habits and eliminate unnecessary ones.
The easiest way to do to track your day to day expenses is by noting it down in a diary or using an expense manager app. This way at the month you can come to know exactly the amount you have spent on different things and do away with expenses which are unnecessary like excessive shopping, eating out etc.
Invest in instruments which can multiply your wealth at a faster pace
To increase your net worth, it is very important to invest in instruments which can grow your wealth at a faster pace. Traditional investments like bank fixed deposits, postal deposits, KVP, bonds traditional life insurance policies offer low returns in the range of 5-6.5%, which are inadequate to multiply your wealth.
To increase your net worth at a faster pace, it is very important to allocate a significant portion of your investments to equity. Equity has not only beaten all other asset classes hands down till date but is also the only investment which has the power to beat inflation.
An investment of Rs. 1,00,000 in a bank deposit at an interest rate of 6.5% would amount to Rs. 1,90,000 after 10 years.
However the same amount invested in good stocks can generate much higher returns. Assuming even a modest 15% rate of return the worth of your investment would be Rs. 4,36,000 at the end of 10 years.
A big difference of Rs. 2,46,000. That is the power of equity to grow your net worth at a faster pace. Now imagine the kind of gains you can expect if the rate of return is even higher at 25-25%.
If you are not sure about the process of choosing quality stocks for investment, it would be highly advisable to seek professional advice.
If you haven’t calculated your net worth till date, it is just the right time to do so. As in any journey, even in the journey of investing, it is important to know where you stand to take the appropriate steps to move in the right direction.
As rightly said by American actor and newspaper columnist, Will Rogers “Even if you’re on the right track, you’ll get run over if you just sit there”.
Read more: How Long-term investing helps create life-changing wealth – TOI.