For all your efforts you would like to know the end results. Networth is the end result of all the efforts you put in every day to earn money. The irony is most of the people do not know what their net-worth is.
Do you know what your net-worth is? Unless you maintain the books of accounts, your the answer would be No.
But why is knowing net-worth is important? Networth is the figure which tells you the net result of all your efforts to earn money. Networth tells you what is left with you after you have spent money you have earned.
Networth is the figure which is important to know for everyone. Ignorance about this figure can ruin your life especially when the loans are available in abundance.
“We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and to become financially literate.” Robert Kiyosaki
Balance Sheet is the financial statement of the assets you own and the liabilities you have incurred. Your net-worth is your assets minus your liabilities.
Here are 4 reasons why knowing your Networth is important.
It helps you to determine your sustainable borrowing level
Yes, over borrowing have ruined many rich people. Knowing your overall asset to liabilities ratio helps you to arrive at a sustainable borrowing level. Usually, banks lend two times of your net-worth.
However if your income level is non-sustainable, higher borrowing is risky. Play conservative and borrow minimal.
Higher borrowing for appreciating assets like home could be a good decision but borrowing for risky investments like shares and depreciating assets like cars are dangerous.
Your net worth is an indicator of your financial shock absorbing level.
It helps you to readjust your spending habits
If you are earning well but your net worth is not matching your income level, it indicates you spend more than you should.
You should invest a reasonable amount from your earning for your future. Your present income should be divided into two parts. One part is for the present survival and the second part is for the future sustenance.
In a volatile business and career scenario, saving and investing for the future is mandatory for a prudent person.
It gives confidence in bad times
In bad times, your net-worth gives you comfort level. A good net-worth gives you a longer breathing time. Knowing net-worth is essential as it can alert a person in bad time for quick action.
Not knowing your net-worth may panic you quickly in bad times. A good net-worth is an indication of how long you can survive bad times.
Your net-worth is the money you own. Usually, many people spend recklessly on borrowed money. They assure cash flow is the indicator of your financial health.
Cashflow is important for liquidity perspective but cashflow should be your own not borrowed cashflow.
Borrowed cashflow is good only in case of an emergency but if it becomes a habit to maintain and survive on a borrowed cashflow; it’s a financially suicidal risk you are riding upon.
It helps you to take a calculated risk
If you know your net-worth you know your risk appetite. It helps you to determine your risk capital. How much you can invest in risky but high return investments like equity shares is the call your net-worth helps you to take.
You can take a calculated risk if you know your sustainable downside. Knowing your net-worth helps you in important investment decisions.
“Focus on all four of your net worth factors: increasing your income, increasing your savings, increasing your investment returns, and decreasing your cost of living by simplifying your lifestyle.” T. Harv Eker
Know your net-worth today. Know what you and own and what you owe. For having control on your personal finances knowing your net-worth is crucial. For knowing the net result of all your earning efforts, knowing your net-worth is crucial.
Not knowing your net-worth means not knowing the end results of all your efforts.