Understanding your true net worth!

An accurate understanding of one's financial well being is of utmost importance at every stage of life. So, whether you are a student, fresher into the job market or a veteran - assessment of personal financial health is important in order to make good financial decisions. For example, even if are purchasing a car, purchasing a home, taking a student loan, liquidating an investment or making a risky investment  - all these decisions can be made only if you know your financial status well.

An individual's financial health is computed by means of his personal net worth. In simple terms, personal net worth is the net asset value of an individual. Personal net worth is calculated as follows:
[Total Assets] less [Total Liabilities]
One must assess his / her net personal worth on a regular basis. This is because corrective measures can be taken in time if the net personal worth starts declining. It is much easier to recover at early stages than once you find yourself in deep financial crisis. Your net personal worth will also give you an idea about how financial institutions perceive you as a borrower.  For example, Deepak, an IT consultant with a software company wants to purchase a car. He has set his eyes on the Toyota Corolla. The car dealer informs him that the on road price of the car will come to Rs.11.25 L.  If he takes a car loan, he will have to pay a monthly EMI of Rs. 15,000 towards repayment of the car loan and pay an amount of Rs. 1.0 L as down payment. Deepak's monthly salary is Rs.0.9L and the EMI as well as the down payment seems easily affordable. However, Deepak should assess whether he can afford to buy this car at present by considering all his liabilities and assets. His personal net worth should give him a fair idea of his current financial status and whether he can afford to buy the car.
Computation of Deepak's personal net worth

Assets	Rupees in '000
Current Market Value of his apartment	5000
Market Value of his TVS Scooty (two - wheeler)	10
Value of Fixed Deposits	500
Market Value of shares held by him	200
Market Value of Mutual Funds owned by him	500
Market Value of Jewellery	300
Value of NSCs	5
Amount in PPF	10
Cash in bank and in hand	100
Total Assets (A)	6625
Liabilities
Outstanding home loan	4500
Outstanding loan on TVS Scooty	2
Outstanding student loan	200
Outstanding credit card bills	50
Total Liabilities (B)	4752
Personal Net worth (A-B)	1873

Assuming that Deepak's monthly outflow towards EMIs of outstanding loans is Rs. 35,000/- and looking at his personal net worth, a corolla is a viable option. This is because he has a positive net worth of Rs.18.73 L. Further he is able to make payments of EMIs with ease considering his current income and should also be able to pay the EMI on the new car loan.
Note that knowledge of current personal net worth is essential to make financial decisions. It is important to reevaluate personal net worth while making any important financial decision as the value of assets and liabilities is likely to change. Also, net worth should not be considered in isolation. It is a good idea to consider factors like current and future income levels, future liabilities etc. For example, if Deepak has to bear the expenses of his sister's wedding which costs him approximately Rs. 9 L and he has to sell off some of his investment to meet the wedding expenses, his personal net worth will look different. Further, if the market value of assets declines, his personal net worth will also take a hit. Let us take a look:
Deepak's Personal Net worth if he has to bear his sister's wedding expenses and if the economy takes a down turn:

Assets	Rupees in '000
Current Market Value of his apartment	3000
Market Value of his TVS Scooty (two - wheeler)	10
Value of Fixed Deposits	0
Market Value of shares held by him	100
Market Value of Mutual Funds owned by him	200
Market Value of Jewellery	100
Value of NSCs	5
Amount in PPF	10
Cash in bank and in hand	0
Total Assets (A)	3425
Liabilities
Outstanding home loan	4500
Outstanding loan on TVS Scooty	2
Outstanding student loan	200
Outstanding credit card bills	50
Total Liabilities (B)	4752
Personal Net worth (A-B)	(1327)

Clearly, in the above situation, Deepak should not purchase a car at present and should concentrate on improving his personal net worth.