Net Worth - Key to Managing Money
Grab a pen and a piece of paper and
jot down off the top of your head your household net worth. Net worth,
in case you are not exactly sure, is the total value of your assets minus
your total liabilities.
The first thing  to
know about your net worth estimate is that it probably is wrong - not just
by a few ringgit, but by a lot of ringgit. Numerous studies have found
that families either don’t have any idea what they are worth, or their
idea is wrong. A study last year by a research scientist estimated that
70 percent of households underestimate their net worth, and 25 percent
overestimate their wealth.
Furthermore, those who underestimate
their wealth do so by nearly 40 percent. For every ringgit they are really
worth, they think they are worth only 62 sen, and for each ringgit their
wealth rises, they think they are gaining only 27 sen.
Why should you care about your
net worth?
Net worth is the best measurement
of the state of your financial health. Most of our major spending, investing
and other financial decisions are made, or should be, based on our net
worth, and obviously the more accurate that estimate, the better. For example,
if you overestimate your net worth, you may not save as much as you should
for your retirement, or you may overspend based on your perceived wealth.
Underestimate your net worth, and you may either save more than necessary
for your retirement, take on extra investment risk in the belief you need
to make up for what you perceive as insufficient wealth, or buy insufficient
insurance coverage.
The recent focus on the "wealth effect"
illustrates how net worth affects household financial behavior. During
the late 1990s and early part of 2000, Malaysian consumers spent heavily
because they had seen their stock investments rise in value and that made
them feel wealthier - however accurate that feeling was for any particular
household. However, with the decline in the stock market in 2000, the total
net worth of Malaysian households fell in 2000. Many economists attribute
the nation’s current economic slump to declining consumer confidence in
response to their declining net worth.
Calculating an accurate picture of
your net worth is relatively easy. Generally, start with how much money
you have in current and savings accounts, savings bonds (current value),
and fixed deposit and money markets. Add in the current market value of
your stocks, bonds, home, real estate investments, retirement plan accounts,
individual retirement accounts and business interests. Include the surrender
value of your annuities and the cash (surrender) value of your life insurance.
And add up the value of your personal belongings: jewelry, automobiles,
clothing, furnishings, appliances, collectibles, computers, and so on.
Their value should be their current market value - what you could get in
cash for the items.
On the liability side, include the
mortgage on your home, car loans, student loans, credit-card debt, unpaid
taxes, insurance premiums, charitable pledges and outstanding bills. Subtract
your liabilities from your assets. That’s your net worth. You can estimate
your net worth with our Net Worth Calculator.
Take this measurement every year.
It provides a benchmark about how well you are doing. Is your net worth
positive or negative, and perhaps more important, is it improving or getting
worse? Take a freshly-minted college graduate saddled with student loans.
Their net worth is probably negative. They land a job that pays well. They
buy a new car, loads of consumer items, maybe even a new home or condo.
Current income is enough to pay the bills, but that’s about it. Yet what
about their net worth? Unless they’ve made a concerted effort to pay extra
toward the student loans, they still have a negative net worth. In fact,
the car and house have added to that negative picture. If they aren’t salting
away much money in savings and investing, their overall financial health
isn’t as sound as their regular income would make it appear. |
