Your net worth — i.e. your assets minus your liabilities — is by no means the sole indicator of your financial well-being or the most important determinant for financial advice. But it does represent where you stand financially, at least in terms of what you own and what you owe.
While measuring financial status based on a single metric can be reductive, calculating your net worth — and separately considering other aspects like your emergency plan, cashflow, risk appetite, etc. — is a good starting point for putting a financial plan in place. People are generally more aware of assets than liabilities, or neglect that some assets are funded by and tied up with liabilities. We often come across people wanting to retire early or upgrade their lifestyle, and while it’s good to be optimistic, knowing your net worth gives you a more realistic perspective on what’s needed to get you there — together, we can then take a call on setting short-term goals or shifting them to the long-term.
We’ve found that some reasons people remain unaware of their net worth are that the process of collecting data seems daunting and that they’re not sure about how to calculate net worth.
But knowing this figure is important. In the process of figuring out the ratio of your assets to liabilities, you’ll get an idea of the liquid or illiquid assets you hold, whether your assets are adequately diversified (across real estate, equity, and so on) and what the nature of your liabilities is (are they good liabilities that help you build an asset over time, personal loans that need to be paid off in the short-term, or regular EMI payments?). Essentially, your net worth indicates how you’re going about your asset allocation and liability planning. It tells us something about you, and where we need to intervene.
In the Financial Wellness Plan we create for our members, after an introduction to our mission, process and approach towards financial planning, we not only show you the current trajectory of your net worth — assuming you continue your present approach towards managing your money — but also give you a trajectory of what your net worth could be if you plan your finances effectively. The latter is not a guarantee of any sort of course; it simply predicts where you could possibly reach if you handle your assets, liabilities and emergency plan more efficiently. In other words, it shows you the potential for a better financial future and helps us work on the scope for improvement.
People generally think of net worth as an indicator of financial well-being, but at 1 Finance, we allocate a financial behaviour score to you, which is a more accurate and holistic representation of where you are on the spectrum ranging from financial independence to financial freedom.
There’s this idea that only people whose net worth is hitting the roof need financial advice — but everyone, regardless of where they are on their wealth creation journey, can benefit from a helping hand and an unbiased lens on their finances. We don’t offer financial advice based solely on your current net worth since that gives a very limited view of things, we don’t make misleading promises of growing your net worth exponentially, and our suggestions are not targeted towards increasing net worth but enhancing financial well-being. However, we do believe that knowing your net worth is important — it gives you clarity on where you stand and where you need to reach, and it offers us some insight on getting you there. It underlines why financial planning is essential for everyone.