Wednesday, February 24, 2010

Net Worth

I was still working on this one and my lappy mis-behaved and it got posted un-cooked.
So I pulled it pack.
Now it's well cooked, so I am reposting same. :)


I know lots of PF blogger who calculate their Net Worth and check/update it periodically. I found this idea little intriguing because this idea is Non-Indian as per my values. I mean if I'll tell somebody that tomorrow if I need to sell myself, my cost will be XXX Rs, he is not going to talk to me again for sure. And in case some guy will talk like this, people will definitely think that he is talking about the amount of dowry he expects. :P

Irrespective of what I think, people do it and according to them it's a good number that tells you where you stand currently, in financial terms. So, I thought, it might be interesting to do a post on something I am not enthusiastic about.

Net worth in simple words mean what's the value of all assets you have. (If you ever get kidnapped, this number will help your kidnappers in deciding how much ransom they can demand for you :).) From personal finance perspective, it will let you know where you stand today and in case you know where you want to end financially, you can determine the difference. Once you know the value of all the assets you own, you can also decide how much risk you can take or how much insurance you might need to protect your assets.

Formula for Net Worth:
Net Worth = Value of all assets - Value of all liabilities

Thumb rule for Net Worth is: your net worth should be your age times your salary, divided by ten.

For example:
Age: 35 Yrs
Annual Salary: Rs 8 Lakh (800 Thousand)
Ideal Net Worth: (35*800000)/10 = Rs. 28, 00,000(Rs 28 Lakhs).

According to the thumb rule, if your net worth is around Rs 28 Lakhs, you are doing good, else buck up.

P.S. The formula and thumb rule, both are taken from a book, The Millionaire Next Door.

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