We all wonder in our lives that where do we stand in terms of money or properties we possess or how much wealth do we need to be become financially strong and eventually free.
An analysis of your economic health is essentially at regular intervals, say, every year, to be able to make any major financial decisions in your life.
Similar to our physical health, where you go through medical health check-ups to mitigate health risks timely, by ascertaining your financial health, you assess your financial risk-taking abilities and for instance, big-ticket purchases or investing somewhere, more confidently.
Furthermore, your economic health also, requires constant evaluation, in terms of assets we possess against the liabilities, if any, that may be reducing your net worth.
What is Net worth?
Net worth of any individual is not only assessed through the money he or she has, but also, the money which has to be given back, to the people or banks.
Thus, net worth is a difference between the Asset and the Liabilities of an individual. If the assets are more than your liabilities, your net worth is negative, which means you are broke and require to make efforts to reduce liabilities and increase assets.
However, if your assets are more than your liabilities, the amount of difference is your net worth.
NET WORTH = ASSETS – LIABILITES
Further, to understand the concept deeply, you may first need to understand the terms, such as, “Assets” and “Liabilities”.
What are Assets?
As per the book, “Rich Dad Poor Dad”, by Robert Kiyosaki, in the context of individual wealth, Asset is something which brings money to your pocket. In other words, assets are the different sources of income of a person or a household.
For instance, the skills you have to generate income, rental property, stocks, bonds, commodities, gold to name a few. Here, it is important that an asset should always bring cash flows to you.
Conversely, if you have expensive car or gadget, it will not generate any income for you, in fact, you have to spend money to up keep the same and over a period of time, it diminishes in value and reduce your net worth.
However, if you have bought car for renting, it becomes an asset as it will bring money to your pocket.
What is a Liability?
In the same book mentioned above, says, a liability is something which take money out of your pocket. Most of the people are spending their hard-earned money and creating liabilities and hampering their net worth.
Examples of liabilities are: interests you have to pay on loans and mortgages, buying expensive car and other things or impulsive shopping for the things you do not need.
Remember, if you buy things you do not need, you may have to sell things which you need.
In this way, they deplete their cash and other assets and increases liabilities, results in decrease in your net worth.
Here is are some of the examples of Assets and Liabilities to calculate your net worth:
| S.No. | Assets | Income Received as: |
| 1 | Own skills | Salary/Fees |
| 2 | Real Estate | Rentals/Price appreciate |
| 3 | Equity markets | Capital gain/Dividend |
| 4 | Bonds/FDs/Deposits | Interest Income |
| 5 | Your Business | Profits/Resale value |
| 6 | Commodities and Gold | Price appreciations |
| 7 | Art, Antique, wines | Sale value |
| 8 | Cash | Currency value |
| S.No. | Liabilities | Need to Pay: |
| 1 | Consumer and personal Loans | Heavy Interest |
| 2 | Mortgage | Interest |
| 3 | Expensive products | Diminishing value/maintenance |
| 4 | Unwanted items | Money loss |
| 5 | Over-sized House | Extra expenditure & maintenance |
How to calculate your Net Worth?
We will understand the calculation of net worth, as described earlier, with an example:
Below is the statement of assets and liabilities of a Mr. X :-
| S.No. | Assets | Amount | Liabilities | Amount |
| 1 | Own skills | 50000 | Consumer Loans | 50000 |
| 2 | Real Estate Rentals | 25000 | Mortgage | 100000 |
| 3 | Equity markets | 50000 | Expensive products | 35000 |
| 4 | Bonds/FDs/Deposits | 20000 | Unwanted items | 10000 |
| 5 | Business | 20000 | ||
| 6 | Commodities and Gold | 40000 | ||
| 7 | Art, Antique, wines | 10000 | ||
| 8 | Total | 215000 | Total | 195000 |
As we can see above, the assets are more than the liabilities by 20000 bucks, So, the person’s net worth comes to 20000/- , having in funds or possession of property income.
Conversely, somehow if the liabilities are more than the assets of an individual, the net worth becomes negative and the person in financial crises who needs to reduce his expenditure or may sell some assets to pay off some liabilities.
This way, he might be able to save himself from the insolvent financial situation and allow positive cash flows to himself and increase your net worth.
How to Build Assets?
As we have understood as to why we need to build assets, because we have to have positive cash flows and create wealth in the long run.
However, before explaining how to create assets, it is equally important to prepare yourself before investing in any of the assets having meaningful returns in the future and meet your financial goals.
Some of the preparatory steps to build assets to create great wealth and increase your Net Worth, are given below: –
- Build an emergency fund:
As the name suggests, an emergency fund is the fund which may be used in case of emergency. This fund is required by every household who are relying on their salaries and incomes from a business.
In case, there is situation where you have lost your job or had to shut down the business or stoppage of only income you have, then by support of emergency fund, you should be able to live comfortably along with your family for some time.
You should have emergency funds always liquid, meaning, easy to withdraw any time you require, such as, bank cash account, liquid debt fund and others. - Your expenses should always be less than your income:
This is no brainer that if your income is more than your expenses and there are surplus of funds each month, you may be able to thinking of buying an asset, such as, stocks, bonds, real estate and others.
Thus, it is utmost important to keep an eye on your daily/weekly/monthly expenses and track those regularly, perhaps with the help of a mobile app. Also, efforts should be made to reduce unnecessary expenditures to enhance your surplus of money. - Analyze your Risk profile:
Before making any investment decisions in any asset, you should always check your risk-taking abilities. Your risk profile may differ from the people around you.
For instance, if you have to spend bigger sum of money on your near-term goals, such as, child education or down payment for the house in next two to three years, you do not want to invest in stock markets or even real estate, due to the risk of eroding your capital in the short term and low liquidity in the real estate.
Additionally, if you cannot see your investments going down by 10% or 20% at any point of time and wait for longer period to come back to profits, you should not invest in stock markets or equities, because, the short-term ups and downs are the integral feature here.
Then you better of investing in fixed deposits and insurance saving plans, however, as the risk of an asset goes down, the returns are also moderate, even in the long term. - Increase your savings:
Continuing to the 1st point, it is also good idea to improve your income and savings, just in case, the expenses are no longer could be reduced.
Firstly, you have to improve your skills and knowledge to go up the ladder, resulting in your income enhancement. Re-skilling is a constant endeavour these days due to huge technological advancements in every industry and the way people do their jobs.
Read: How to increase your savings.
Secondly, start a side hustle or a part time venture, in addition to your regular income by starting your own consultancy or online work through re-skilling, for instance and digital skills to increase your net worth. - Regular Investing:
After deciding about the assets, you want to build over a period of time, you need to regularly invest and improve the corpus of funds for even better returns.
For instance, if you have decided to invest in mutual funds, you should opt for systematic investment plans, wherein, you just give instructions to your unit provider to buying a particular unit or for a sum of money each week of month, it will be automatically investing the amount.
Importantly, your decision making or emotions will not hamper your regular investment plan, if you automate your investment plan. Believe me, after some years you will proud of your decisions, irrespective of the financial market or the economic conditions of your county and increase your net worth. - Build a mindset of an investor:
Building a mindset of an investor or a wealth creator is nothing but to improve on your assets and seek opportunities to learn about the investing in different market situations.
For instance, gold prices increase when there is an economic slowdown, conversely, equity markets generally go down in terms of share prices and there may be immediate losses.
Always look for investing in existing ones or seek for new investment avenues to invest more at each opportunity. Be greedy when others are fearful and vice versa.
Secondly, always increase the amount to invest at every opportunity on top of regular investments by increasing your surplus or hike in the remunerations to increase your net worth.
Read: Top traits of a successful investor. - Invest for long term:
After you have made your arrangements for short term money requirements, such as, emergency fund, you should look for investing for long term.
Statistically, equity markets have given the best returns in the last three decades. As the duration of your investments increases, the short-term fluctuations or market ups and downs are iron out.
Meaning, sudden changes in the equity markets makes no difference to a long-term investment, on the contrary, these undulations give the opportunists to investor to invest more at low prices for even better returns than index.
Furthermore, due the long-term horizon of the investors, such as, 20 or 30 years, the compounding effect makes the returns even faster and help in building bigger wealth and to increase your net worth.
Steps to build your Assets to enhance your Net Worth
Now, when you have understood the traits of a successful investor, you can start acquiring assets, in which you want to invest for a long time. This is done in below mentioned steps to increase your net worth: –
1. Identify the asset or investment, you want to invest:
As stated earlier, by analyzing different assets available to invest, you need to short list few asset classes according to your risk appetite:
That is,
a) Risk involved in an asset: Check the characteristics and the price trends of the asset for the last few decades, are the ups and downs are suitable to your risk profile, meaning, you are comfortable with the sudden drop in the value of a particular asset.
For example: Stock markets have given best of returns in the last three decades but they have corrected about 30% to 60% in several times in between.
b) Return expectations: Set your return expectations according to the asset, you cannot expect spectacular returns from gold or bonds, even in the long period of time, those are to bring stability to your portfolio of investments.
For exponential returns you have to invest in equity markets for long term. However, check the first point, if you can face short term undulations in the markets.
c) Meeting your financial goals: Even before selecting an asset to invest in, you should check the suitability to your financial goals and help in fulfilling your financial needs.
For instance, if you want to invest for a goal of making down payment for a new home, you may be required that money in few years.
Selecting stock market for this goal can be dangerous method, due to market volatility or you may face low prices at a time, when you want to make the down payment. Fixed deposits and bonds could be the best solution for up to 4-5 years of time duration financial goals.
However, if want to invest for your comfortable retirement and have decades for it, then stocks market may be the best solution, subject to short term fluctuations, it provides top returns in the long period of time build big corpus of money.
2. Process of Accumulation:
Despite, whatever type of assets, you have selected for investing, you have to invest regularly in staggered manner and do not invest all your money at once to reduce risk of capital loss in the short term.
Here, discipline to invest at regular intervals, will fetch you larger gains than timing the asset, that is, buying at lower prices and selling at top price, accumulate those assets in greater volume in a long period of time.
Moreover, take every opportunity and each wind fall gains to top up your investments in that asset to start a snow ball effect, which grows in size with time and increase your net worth.
Importantly, make the investing process automated with the help of the financial institution or broker with which you are investing. Not only it will make the investing effortless but also, keep your unwanted emotions of stopping investing, out of picture.
3. Stay Invested:
Stay invested in the investments you have made over the years to make a greater wealth out of it, because of “power of compounding”, which is the 8th wonder of the world, accordingly to Albert Einstein.
There will be situations in between, such as, war, pandemic, political and financial crises, when you want to withdraw your investments. But one who saw all these imperfect situations, makes the biggest money by staying invested or till your goals.
4. Track the fundamentals:
Tracking the fundamentals means, collecting information about the asset you have invested from the trusted sources. Wherein, you have to analyze the current and future viability of the asset, to decide to retain or sell and shift to other asset class.
For instance, for the last 10 years there were miniscule appreciation in the prices of the real estates around the world. Only recently, there is an uptick in the values due to demand of houses to live and work from home culture emerged due to COVID pandemic.
On the other hand, stock markets and gold have given better returns on investments during this period.
Resulting, you should be aware of the different asset classes and diversify your investable amount for risk spread and better returns with low volatility.
5. Starting your own business:
Starting a business can be best decision, even in terms of investing and reap unlimited rewards. If you have the knowledge and some experience or a mentorship on your side, you may want start a business to capitalize on your skills and experience.
However, lot many people do not know how to do the business and jump to start immediately and burn their fingers in terms of losing their hard-earned money.
So, it is ought most important to learn every aspect of the business activities, such as, products, marketing, finance and operations, to successfully run your business.
Furthermore, it is also important to invest the profits back to expand your business by every year, so that, it your business grows manifold in the coming years to increase your net worth.
Later, you can higher managers to run your business for you and you may start another business or start investing surplus money in other asset classes, which you understand deeply.
Bottom line:
Building assets not liabilities in your life, is the biggest decision you can take to enhance your Net worth. Understand the difference between the two and devote your efforts to create more assets for yourself for more than one source of income to increase your net worth.
Moreover, learn about all aspects about investing from different sources, like, journals, television business programs, seminars about investing and reading books about different topics of business and investing.
Most importantly, build your mindset of an investor and surround yourself with people who share your dream of building assets and, exponential growth in your net worth and create abundance of wealth when you want to retire.
Disclaimer: