Investment Objectives & Advice

How far from being a Billionaire: Calculate Your Net-worth

“To know where you stand is the first step to start navigating yourself.”

Recently the news article was published stating that the Net-worth of Mr. Mukesh Ambani will be highest by 2014 and he’ll become world’s richest person. Somewhere deep down in our hearts we all want to be rich and billionaire like him, but if we ask from any individual about his Net-worth in 99% of the cases he’ll not be able to answer it. That’s basically we like to dream but not to plan to reach them and know our current standing. Today’s article will help you in determining the Net-Worth of yours.

Net-worth is a fairly simple concept and it is used in assessing your financial standing on a particular date. Net-worth of any individual is calculated on a particular date and will vary from day to day. Since the basis of calculating the value of two different categories Assets and Liabilities, the difference between these two is called as Net-worth. If the Assets of individual are more than his liabilities, he will have positive Net-worth and if assets are less than liabilities, he is too burdened with loans and might be bankrupt. Assets are things which are either cash or can be converted to cash as and when required. Some examples of the Assets are

  • Land and buildings
  • Jewellery
  • Investments as Fixed Deposits, Mutual Funds, Insurance, Provident Funds
  • Stocks and Shares
  • Car
  • Gold
  • Provident Fund
  • Etc etc

While calculating the value of these assets, we should take care of that the value of assets should be at a current market price means the price at which it can be sold at, not at the price at which it is bought. For e.g. Ranu has bought a house in 2000 for INR 500,000 but at present due to the soaring market prices of real estate he can sell his house in march 2010 at INR 1,500,000. So while calculating his Net-worth on March 2010 the value of the house should be taken as INR 1,500,000.

Now it’s very rare in current life cycle and in early stages of life we have only huge amount of assets on our sheet. With most of the assets we have attached liabilities, which are the amounts we have to repay for our borrowings. Some of the common liabilities are

  • Personal Loan
  • Education Loan
  • Home Loan
  • Car Loan
  • Credit card Bills
  • Etc etc

After each months EMI payment these liabilities also keep on changing and vary from date to date. So we have to put the current outstanding liability amount only and interest should not be included in that for e.g. Ranu had taken home loan of INR 2,000,000 in 2009 his annual Installment towards repayment is INR 200,000. Now if rate of interest is assumed to be 8% then on rough estimate his interest payment is INR 160,000 and rest INR 40,000 is towards Loan amount. So in march 2010 while valuing his liability INR 1,960,000 should be put in liability side. Hence the Net-worth of any individual is calculated at a particular date, on the current market value of assets and liabilities.

To know your current Net-worth you can download the sheet from the following link the password to download is eduform3

http://www.2shared.com/file/Mv4cX2qS/Net_Worth.html

In next article we’ll understand how to determine “your speed to become billionaire” by doing the fund flow analysis. Article will be published on October 23rd,2010.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.