Putting A Price on Yourself? This is Why You Need to Know Your Own Net Worth
Updated: Feb 4, 2020
by Lee Xin Hui, Rachel. |
Crunch is partnering with Hey Alfred - the smartest financial assistant app powered by Ai to help you track all of your financial assets; to bring you this series.
In this series, we want to provide you with helpful information to gain better financial literacy. Through this journey, you will learn how to manage your money better, save more and secure your finances for the future. If you often find yourself clueless on money matters like paying your first income tax, applying for loans or even how to save more without feeling miserable, this series is just for you.
We got your back. It’s time to take control of your #MoneyMatters.
We always read about the term of 'net worth' when we Google celebrities, top CEOs, or any other well-known person. But do you know what exactly does ‘net worth’ mean? Do you know what’s yours, or even the fact that you have one too?
Mathematically, your net worth is calculated by subtracting your liability from your assets. Simply defined, it is the difference between what you own and what you owe. Here’s an example, if you have RM100,000 worth of assets and RM150,000 worth of liabilities, your net worth would be:
RM100,000 - RM150,000 = -RM50,000
Alternatively, you can leave the math to this Crunch Calculator, all you need to do is to key in your financial details, and the calculator will do its job. The team from Hey Alfred created this calculator in hopes to help us understand our finances better and to keep track of our overall financial health.
So now you know your net worth, what does it mean? What do you do with that information?
Your net worth is an important piece of information for two reasons: it helps you determine where you stand financially, and it helps you plan your next steps towards your financial goals.
What does my net worth say about my financial health?
Using the example above, does a negative net worth reflect poor financial management? No, it doesn’t. Your net worth will go through cycles depending if you have more assets or liabilities in a certain period of your life - for example as most of us have just celebrated Chinese New Year recently, your net worth usually goes up or down during this period of your life depending whether you’re giving out or receiving ang paos. What’s important is the trend of your net worth - as long as it’s going up over a long period of time, rest assured your financial status isn’t in jeopardy.
Planning according to your net worth
Now that we know what your net worth should look like over a period of time, how do we make sure it looks that way? In other words, what are the steps we can take to ensure it is growing? First, you need to know your financial goals. Everyone’s goals are different, and the target can change by the year as well; so naturally the target net worth will be different too. You can refer to this article that guides you on setting financial goals.
However, you have zero clue where to get started, here’s a simple formula to roughly determine what your yearly target net worth should be:
Totals Assets - Total Liabilities + [Net monthly savings x12] = Yearly Target Net Worth
After knowing your net worth, what should you do about it?
When you have your current net worth and your supposed yearly target net worth, you can see where you stand financially; and this is important to help you plan out your expenses wisely and accordingly. For example, if you’re falling behind, you’ll think of where to minimize your expenses and maximize your savings; if you’re ahead of your target or right on track, then you’ll know that your current efforts are effective, so stay consistent with what you’re doing!
Knowing and planning financially according to your net worth also brings about several advantages:
1. You don't risk spending too much
Without a plan in mind, we’re more likely to overspend even if we are careful with our expenses; that is because we don’t have a detailed breakdown of where and how you should be spending money on.
On the other hand, when you already have a plan, it serves as a guidance to keep your expenses on track. Here’s an example, you have to get a gift for your sister’s birthday this month, but you currently don’t have enough and the situation is not dire enough to use your emergency fund; with a solid plan, you can know where to cut down on your expenses to fund that gift instead of spending them all and having no savings for the month. You can either cook yourself meals instead of eating out, opt out of night outs for the month, etc. I know it sounds like sucking the fun out of things, but it’s always better to live frugally now than to deal with financial troubles in the future.
2. You don't starve yourselves from occasional fun
That being said, does that mean we should stay at home 24/7 in order to save up? No! Being more careful with your expenses doesn’t require you to coop yourself up everyday and not having any form of entertainment. It simply helps you to know when and how often you can afford to spend on entertainment. For example, if you only have enough to head out for drinks with your friends once every two months, plan your night outs according to that. You still get to catch up with your friends and have fun once in a while, but not at the expense of your savings or future financial difficulties!
3. Gives you assurance
Because you’re taking the correct measures to stay financially healthy, you won’t be in a constant worry about worse money problems (ie: bankruptcy). You know that you have emergency funds you don’t touch unless you really need to, you know you’re not spending money on a whim, and you know you have extra savings on occasions that require you to spend a little more (birthdays, anniversaries, celebrations, etc).
Having a correct financial plan helps you become more mindful of your expenses, and at the same time saves you from being constantly anxious about your financial status in the long run.
You can never be too early or too late to get started on financial planning, after all, what matters is that you start and stick to the plan. So have your current net worth calculated, know what your target net worth should be, and start your journey towards a healthier financial status!
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