Your net worth provides a snapshot of your current financial health. When you’re planning for the future, it makes sense to assess your net worth and understand its implications. As with other health indicators, a positive net worth demonstrates that your finances are relatively sound and that you are on track to building wealth. On the other hand, a negative net worth indicates that you may need to work on your finances.
In simple terms, your net worth is the value of your assets at any given point in time, minus any outstanding liabilities. Put another way, your net worth is the difference between what you own and what you owe. The concept of net worth applies to companies, businesses, and even nations. Someone with a substantial net worth is referred to as a high-net-worth individual (HNWI). A common measure of HNWI status is having at least $1 million (Dh3.67 million) in investable or liquid funds. This is referred to by another term: liquid net worth.
The difference between net worth and liquid net worth is that liquid net worth only considers cash or other assets in cash equivalents after liabilities are deducted. For example, your liquid net worth doesn’t include assets that can’t easily be converted to cash, such as retirement accounts or real estate. Nor should it factor in liabilities that aren’t due immediately, such as mortgage payments.
Taking the time to calculate your net worth helps you understand how much money you have at your disposal – and reveals the extent of your debts. There are many reasons to be aware of your net worth:
Your net worth isn’t the same as your income, and as such, the final figure may come as a surprise once you’ve worked it out. Here’s how to go about it:
First, add up the value of your assets at current market prices. In addition to your bank balance, you’ll want to consider the present value of any stocks, bonds, fixed deposits, or property you may own. What would each item fetch if you were to sell it? Try to arrive at a conservative value for each. In some cases, you may not have a clear idea of an item’s worth. For example, the market value of your home may be Dh2 million, but you could have an outstanding mortgage of Dh1.25 million. In simple terms, not counting associated fees, the value of your home is Dh750,000. Add up the value of your assets to understand how much they are worth.
Next, add up all your financial obligations or liabilities, such as outstanding car or personal loans, mortgages and any credit card balances. This number represents your total liabilities.
Finally, you’ll want to subtract the total amount of liabilities from the total value of your assets. The amount you would be left with after selling your assets and paying off your debts is your net worth. This number that you arrive at could be positive or negative. A recent college graduate with a significant student loan, for example, may have a negative net worth. However, it’s important to remember that the number – your net worth – really only represents a starting point towards achieving your dreams.
While knowing your net worth can have many benefits, the number may also be deceiving. This is particularly the case when it comes to the value of your home. If you own your own home, it probably represents the biggest chunk of your net worth. However, this value – called your home equity – may not accurately reflect your financial standing. Property prices fluctuate according to several factors, including its age and condition, as well as economic cycles of supply and demand. Accessing your home equity can be a challenge. If you were to sell it, you would still need somewhere to live. You might rent or downsize, which bring their own costs, and consequently, affect your net worth. In this case, it might be more advisable to calculate your accessible net worth, which excludes the value of your primary residence. To do so, follow the steps above, but leave the value of your home out of the equation. For homeowners, this accessible or liquid net worth offers a better representation of their financial situation.
Like your age or weight, your net worth – and your liquid net worth alike – vary over your adult life in line with changing income and spending habits. As you pay down a mortgage or a car loan, for example, your liabilities are reduced, and your net worth may increase. Repeating the calculations on a periodic basis, such as every year, can help you understand whether you are making financial progress or have moved away from your goals. In this way, your net worth can serve as a tool to reevaluate your financial strategies regularly.
So long as you continue to reduce your debts and the value of your assets increases, your net worth will grow over time, improving your financial position. Here are some tips to improve your net worth.
These tips are a great place to start if you're getting started on your wealth journey. However, they may not address the needs of high-net-worth and ultra-high-net-worth individuals. If you fall into this group, you may benefit from strategic business and wealth advisory services. Citibank’s Wealth Management advisory team can help you tap into wealth-building opportunities from around the world, along with the latest market insights, and personalized financial advice and support. From investment advice to asset allocation and insurance planning, Citibank’s comprehensive wealth management services will help protect and grow your investments, so your net worth increases over time.
New to investing? Our investing tips for beginners can help you kickstart your wealth-building journey. Learn why investing is important and get started today.
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This article is intended to provide general information about finance and investments and does not replace or should be taken as professional financial advice. The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article except information on Citibank N.A. – UAE products referenced herein.
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