Your net worth is a crucial indicator of your overall financial well-being, providing you with a snapshot of your financial situation. It’s your financial report card that allows you to evaluate what you need to do to achieve your financial goals.
What is a net worth?
Your net worth is what remains after you deduct your debts (liabilities) from your assets (things you own). To put it simply, it is a representation of what you own and what you owe.
One of the challenges in calculating your net worth is assigning accurate values to all of your assets. It is important to make conservative estimates when placing value on certain assets in order to avoid gaining an inflated picture of your net worth.
For example, your home would generally be considered an asset, but determining its worth accurately can be challenging. You might think it’s worth more than it really is, giving you a misleading net worth. Here is a quick example on calculating your net worth:
| Assets | |
|---|---|
| Savings | RM100,000 |
| Stock portfolio | RM100,000 |
| Car | RM50,000 |
| Total | RM250,000 |
| Liabilities | |
| Remaining car loan | RM20,000 |
| Unpaid credit card bill | RM10,000 |
| Student loan | RM50,000 |
| Personal loan | RM20,000 |
| Total | RM100,000 |
| Net worth (Assets - Liabilities) | RM150,000 |
Why knowing your net worth matters
While maintaining a budget can help keep your spending in check, your net worth forces you to face the realities of your current financial situation.
Periodically reviewing your net worth will help you get a sense of where you are financially and how to get you to where you want to be. This can give you encouragement when you are heading in the right direction and provide a wake-up call if you are not on track.
Goal setting
As mentioned above, your net worth is key to understanding where you are financially and where you want to be. A positive net worth signifies that your assets surpass your debts. This would likely mean that you have financial stability and the potential for growth. Conversely, a negative net worth indicates a need to reassess financial choices and make improvements.
With this in mind, you can start setting and adjusting your aspirations and financial goals. Be it saving up for a home or sending your children to college, your net worth acts as a starting point for creating a practical plan. Your net worth helps you pinpoint areas that require your focus. If your net worth falls short of your goals, you can then work towards establishing precise targets to help enhance it. On the other hand, a positive net worth can indicate room for more ambitious goals.
Track your financial progress
Taking the time to assess your net worth can be beneficial to monitoring your financial journey over time. As you make financial decisions, from paying down debt, to saving or investing, you can clearly observe their impact on your net worth. This is very tangible feedback and can be a distinct motivator in helping you to remain committed to your financial goal.
Keeping track of your net worth can also serve as an early warning system. If you notice that your net worth is declining abruptly, you may have taken on too much debt in a short period of time, or your investments are not performing as well as you expected. In such instances, you can take prompt action to adapt to the situation and avert further financial setbacks.
Wise expenditure
As mentioned previously, knowing your net worth is crucial to helping you identify areas where you are spending too much money. Your budget may say you have disposable income to throw at something you want, but your net worth can paint a more realistic picture of your overall financial health. Just because you can afford something doesn’t mean you have to buy it.
To reduce unnecessary spending and debt, your needs should represent the majority of spending. Also, do be careful as we can end up falsely rationalising a want as a need. Those branded slippers may satisfy a need for footwear, but there are less expensive options available that can keep you on the right track financially.
Net worth FAQ
What is the average net worth in Malaysia?
Based on recent statistics from a global insurance and asset management wealth report, the average Malaysian has RM50,468 (€9,830) in net worth (financial assets) per capita. That puts Malaysia on the 39th spot in global ranking.
What is the net worth of the top 1% in Malaysia?
According to a recent property consultancy wealth report, you just need RM2.2 million in net wealth to join the 1% richest Malaysians. However, take a minute before giving yourself a pat on the back for joining this 1% elite club. You just need to look down south to realise that you require over RM16.1 million net worth to make it to Singapore’s richest 1%.
What is the difference between net income and net worth?
You earn income from either working for someone else or running a business. Your net income is determined after payroll and tax deductions, such as contributions to your EPF. This is different from your net worth, which is defined as the total of everything you own, minus all debts owed.
How often should you calculate your net worth?
There is no solid rule of how often you need to calculate your net worth. It fully depends on each individual when they feel comfortable doing so. For some, calculating their net worth every three months works just fine. Others seem to find yearly calculations much more helpful. However, sometimes it is advisable to recalculate your net worth after big purchases like houses or a new car.
What is liquid net worth?
Liquid net worth basically means a part of your net worth that can be easily converted into cash in a relatively short period of time; as soon as a single day if the need arises. This differs from an asset which could potentially take a much longer time to be converted, such as property or jewelry.
By comprehending your net worth, you will be able to gain invaluable insights into your financial situation. Regularly evaluating your net worth allows you to secure your financial future, plan for retirement, and even help you to develop generational wealth that can help stabilise your childrens’ future. Regardless of whether your net worth currently stands in the positive or negative, understanding it is the first step towards achieving your financial dreams.
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