Net-worth calculator

Welcome back to your personal finance guide!!

Today we are going to talk about another few basic yet confusing terms in personal finance. As a beginner you might have been asked to list down your ‘assets & liabilities’ and calculate your today’s net-worth. Then the terms like ‘asset allocation’ and ‘rebalancing the portfolio’ might have added the chaos. Let's try to understand these today.

When I came across these terms for first time, like any other guy I was absolutely clueless. Though this is mandatory to learn for every individual who is dependent on his/her own income for lifetime needs, it’s not being taught in schools or colleges in this country. As a result, when young people finish their education and come into a job, they ultimately tend to lose their hard-earned money blindly; instead of protecting it and growing it further.

This entire website has been designed with the purpose of helping those who are genuinely willing to work on their personal finance but cannot afford or not willing to spend money on paid guidance.

To start with the term net-worth let’s see the definition first: "Net worth of an individual or an entity is value of total assets owned minus the total liabilities on a given point of time".

For example, suppose on a certain day, you have total 50,000/- Rs in your bank account. You received your credit card bill of total 20,000/- Rs which you must pay within next 12-15 days. So, on that particular day, your net-worth is 50,000-20,000 = 30,000 Rs.

But it’s not that easy in real life, as the bank balance is not the only asset you have (or you are supposed to have) and credit card bill is not your only liability.

So how to calculate this?

Given below is a ready-made template for net-worth calculation. You can download it and fill in the details to know your today’s net-worth.

Net-worth_calculator_v1.0.1.xlsx

Download XLSX • 21KB

Next is asset allocation. Upon going through your financial risk assessment, you might have been advised to distribute your assets among different asset categories – such as aggressive, moderate and/or safe instruments. Now once you know your today’s net-worth and how is it currently distributed, it will be easier for you to know in what proportion your current assets allocation is done, i.e., how your money is allocated to different asset classes.

Once you know this it will be much easier to to rebalance the portfolio if required.

When you download the attachment above and fill in all the details, it will also show you how your assets are currently distributed and in what percentage. Suppose your net-worth is 40,000/- Rs and you are a moderate type of investor. You want to divide your net-worth equally among 'aggressive, high risk-high return' instruments and 'traditional, safe' instruments. But you found that more than 25,000/- Rs are currently allocated to bank deposits which are 'safe but low risk-low return' instruments. In that case you might want to rebalance your upcoming month’s investments in such a way that more amount will go in aggressive instruments. (Note that you don’t always need to redeem and shift your existing investment, break/pause the ongoing deposits/SIPs. You can take the forward-looking approach too)

Now the final question - How often do we need to look at out net-worth and consider rebalancing?

Answer is - once in a quarter or two. Why that long? Because it is human tendency to change our opinions due to changing emotions and/or get influenced by some temporary incidents. But do remember, finance doesn't work that way. If you really want to step up for a significant financial journey, you must learn to control the emotions that might harm you wealth.

The goal here is to make you aware of your net-worth, rebalance it (if required) and thereby considering the big picture of ‘how your financial journey is going’.

Hope you find this article and the attached utility helpful. Stay tuned for more such updates. Grow financially Smart, grow wealthy!!