Net worth is a term mainly used in Google by people seeking to know more about famous people like Elon Musk, Jeff Bezos, and Bill Gates, to mention a few. However, it is imperative to determine your net worth as soon as you hit the 18-year age bracket (don’t worry if you are way past this age).
In this piece, I will take you through the meaning of net worth and how to calculate it.
What is net worth?
Net worth is simply the difference between your assets and liabilities.
The sum of Assets – Sum of Liabilities = Net Worth
For many young adults without any stable source of income, the difference yields a negative, mainly due to accumulated student loans or any other commercial loan. At this stage, you shouldn’t be discouraged because there is still plenty of time and energy in you that you can use to make the necessary financial adjustments.
On the flip side, adults past the age of 35 can still evaluate their net worth and make necessary changes to their financial game plan to achieve their life goals (No time to waste in finance – the earlier you start, the better). Let’s debunk the assets and liabilities.
What are your financial assets?
Many misunderstand what an asset is.
According to the 8th Edition Oxford Dictionary, it is anything valuable or a thing of value that can be used or sold to pay debts. Your car or laptop is not an asset.
If it doesn’t yield more than what you bought it for, it’s not an asset. Your piece of land or an Airbnb that you own is an asset. As time goes by, the property accumulates more money, making it more valuable than it was.
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When computing your assets, make sure to include your savings and collectables that you may sell in the future at a higher price than what you bought them. For instance, quality watches such as the Rolex brand tend to gain value with time as they become more vintage.
Value your social security and pensions (NSSF)
In Kenya, everyone has a right to social security. Therefore, the government commits to taking any measures necessary to secure your financial future. The National Social Security Fund (NSSF) is in charge of providing social security to its members.
Social security and pensions are assets and should be in the computation of your strong suit. Register for NSSF here.
Calculate your financial liabilities
A liability is anything that doesn’t add value to you. Besides, anything that reduces your worth is a liability. Such includes cars as they consume fuel, student loans, mortgage payments, the money you owe your friends and relatives, your pet dog, etc.
Net the difference between assets and liabilities
Financial assets – financial liabilities = net worth
For entrepreneurs, the extrapolation of this simple formula may yield much more summations and subtractions, which will be described later in this series on personal finance.
Read here for more information on net worth and personal finance.