Jeff Bezos, Bill Gates & Warren Buffett – these are the richest people in the world to date. So how are they recognized as the richest? They are not measured by how much of assets they own but by their personal net worth. That’s right, their personal net worth. In this post, we will look at what is personal net worth and how to calculate our own net worth.
Besides that, there will also be a free downloadable personal net worth excel template towards the end of this post courtesy of Munhong.com.
What is personal net worth?
Net worth as defined by investopedia is the amount by which assets exceed liabilities. The concept of net worth is applicable to both individuals and businesses as a key measure of how much an entity is worth. Simply put, your personal net worth equals to your total assets that you own minus your total liabilities that you owe.
Why is calculating your personal net worth important?
Calculating your personal net worth will allow you to identify your current financial position. It is important to have financial goals to achieve your very own financial freedom, but it will be meaningless if you don’t know what is your current financial position.
This is like having a road map. You know where you are supposed to go but you don’t know how to get there because you don’t know where you are at. Calculating your personal net worth will let you know your current position on the map. Only then are you able to chart your path to reach your destination.
Another benefit is that you are able to track your financial progress during every review. Don’t be surprised if some may start off with a negative personal net worth (this is due to having liabilities > assets).
Although that may be worrying, it is always best to know your current financial position, identify steps to improve your net worth position and thereafter, review periodically to track your progress.
Ideally, our personal net worth should be on an increasing trend over time, as we accumulate our wealth. So, how do we calculate our personal net worth? First, we will need to identify what are your personal assets and liabilities.
What is an asset?
An asset is essentially anything of value or a resource of value that can be converted into cash (investopedia). It is basically everything that you own. Some examples of personal assets are:
- Cash and cash equivalents – Money in your savings accounts & current accounts, Fixed Deposits.
- Property & Land
- Items of sizeable value – vehicles, jewellery, collectibles
- Investments – bonds, cash value of life insurance, stocks, unit trusts, retirement funds (i.e. EPF & PRS)
Differentiating Assets & Expenses
Although assets are generally defined as things that you own, not everything that you own is classified as an asset (wait, what?). One way to identify an asset is that generally assets generate you returns (i.e. more money). For instance, buying a company’s share would be considered an asset as it has potential to generate you capital gains and/or dividends.
Another way to differentiate the assets from expenses is that if the item still has value after a year or more and can be easily converted to cash. If so, then that item is an asset. Otherwise, it is considered an expense.
For instance, if I have purchased a new pair of casual shoes for RM200, I would consider it as an expense. This is because the purpose of the shoe is to be worn and over time it will tear and be thrown away. The shoe is not an asset because it’s purpose is to be used and not to be sold (converted to cash).
However, if I now own a pair of limited edition Nike kicks signed by Michael Jordan and kept it as a collectors item, and I know that people are willing to pay RM3,000.00 for it, then I will classify it as an asset. The reason? Because it has value and it can be easily converted into cash (there are willing buyers out there).
It may be a bit tricky but I hope this clarifies on difference between an asset and an expense. For simplicity sake, I’ve already listed out many possible assets that one may own in my excel template below. You may just use that as reference for your net worth calculation. Now, let’s move on to the next part of the equation: liabilities.
What is a liability?
A liability is a debt or an obligation to pay another party. It is simply what you owe others. Some examples of liabilities includes:
- Mortgage loan
- Hire purchase loan
- Credit card balances
- Other personal loans (i.e. loan from family members)
- Student loans (i.e. PTPTN)
So once you have a list of all your assets and all your liabilities, just follow the formula below to calculate your net worth.
As mentioned, I have prepared a free and simple excel template to calculate your personal net worth as below. You may use it to calculate your personal net worth and thereafter track your progress on a monthly or quarterly basis.
Personal Financial Statement – Munhong.com
(Click on the link above to download the template)
Summary of the template
Here’s a summary of the contents in the excel template:
- Summary – Here is where you will be able to track your personal net worth progress over time.
- Input – This is where the input of data happens. The first time of inputting may take a while but the subsequent updating wouldn’t take long.
- Output – A list of all your assets and liabilities will be shown here based on the data inputted. Ultimately, the calculation will bring you to your personal net worth as at a certain date.
- Cash flow – An additional template to calculate your net cash flow every month. The upcoming post (to be released next week) will further discuss on this topic, so stay tuned.
- Help – Contains some things for users to note when using the template.
So, download the file, calculate your personal net worth and take control of your finances today!
Feel free to leave a comment below on how you find the template. If you’re from a non-financial background, did this help you in understanding “personal net worth”, “assets” and “liabilities”? Also, stay tuned for the next post where we will cover the cash flow statement. Cheers!
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