POSTED BY February 22, 2022 COMMENTS (42)ON
The Networth formula is quite simple
Networth = Assets – Liabilities
So, if you have assets of Rs. 2 crores and your liabilities are 50 lacs, your net worth is Rs 1.5 crores.
We have always been taught to calculate networth this way and there is nothing wrong with that, however, it’s a very simplified version of calculating your net worth, which does not give any kind of insights or information to you.
A lot of times, you may also get the wrong impression about someone because of this over-simplified formula. A lot of investors on paper are having good networth, but they never feel RICH or satisfied with what everyone thinks about them.
For example, imagine a person who lives in a house worth 2 crores (no loans) and also has another real estate worth 1 crore, plus mutual funds worth Rs 50 lacs.
Now, what is his/her net worth?
I hope you got my point. Just doing assets minus liabilities, gives you a one-point answer and that misses the details and gives you very superficial information.
Recently, I created a framework using which it becomes simpler to visualize your networth. In this framework, the first step is to categorize all your assets into one of the 4 categories as below.
Let me show you a sample data of how it looks like
|Flat in Bangalore||5500000||Usable|
|Land in Hyderabad||2000000||Blocked|
|Plot in Home town||5000000||Maybe|
|Fixed Deposits (Inheritance)||1000000||Maybe|
|Loan to someone||50000||Maybe|
Note that if there is a home loan or car loan then please adjust the loan amount with the market value of the asset and only write the difference. So if a house is worth Rs 1 crore and the outstanding home loan is 40 lacs, then write value of house as only 60 lacs.
Once you categorize the assets into 4 types, you get clear information on how many assets you own in each category. It helps you a lot to make sense out of it.
Here you can see that by categorizing the assets into types, it’s so clear now that this person has a total of Rs 1.96 crores in those assets which are in Liquid form (FREE) and a major chunk of 1.1 crores (Maybe) is into assets that may or may not come to him. So it’s not very prudent to count on them for his future. If it comes to him/her, it’s a bonus.
Also, Rs. 88.7 lacs is blocked into various assets, so while all the relatives and friends consider it to be his net worth, it’s not available to him/her at the moment if need arises. So he is paper rich, but not in reality.
Also, Rs. 70 lacs is into those assets which is used for consumption purpose, which he will never liquidate for his goals (unless there is an emergency or in theory)
This brings me to the final and conclusive point – “What is his net worth”?
Here, we shall different kinds of networth rather than just looking at one single networth.
Here is what you shall do now
Put your assets in an excel sheet, and mark each one of them into FREE, BLOCKED, USABLE, and MAYBE. I am sure you will get a lot of clarity on how much of your assets fall in these categories and the various kinds of networth you have.
Do give me feedback if you liked this framework and if it helped you? This is just a framework and you can customize it as per your way of looking at things.
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