Thursday, June 4, 2009

Assessing Current Wealth of an Individual

How to assess one's current Net worth ?
Net worth = Items of Value(Assets) - Amounts Owed(Liabilities)

The process to find out ones Net worth is first List out all the assets and the most liquid at the top (cash , bank accounts,FD, Mutual Funds) and then list out all the liabilities(credit card, bills outstanding, Taxes etc).

Liquidity is a measure of the ease with which an asset can be converted into cash or cash equivalents. The easier an asset is to convert into cash, the more liquid it is. Cash is the most Liquid asset.
Following is the table for your reference

Bank Accounts
Fixed Deposits
Cash surrender value of LIC
Cash surrender value of Annuities
Market value of Investments
Mutual Funds
Market Value of House/real Estate
Investment Property
HouseHold Furniture/Appliances
Jewelry/precious metals
Loan Receivables
Total Assets

Credit Card Balances
Bills Outstanding
Outstanding Loan Balances
Taxes Due
Total Liabilities
Net Worth (Assets - Liabilites)

Determining your Net worth is the first step in financial planning and assessing your financial wealth. Net worth is a tool for comparing the changes in your financial position over a period of time. An increase in net worth over a period of time is a favourable trend and a decrease in net worth is a deduction in wealth.
The aim should always be to increase Net Worth
  • Appreciating Assets
  • Reducing Liabilities
  • Increasing Income
  • Reducing the expenses

The relationship between current liquid assets and current liabilities indicates relative ease or difficulty in paying upcoming debts. This evaluation ratio is the current ratio and is determined as follows

Current Ratio = Current Assets / Current Liabilities

The other important ratio is debt ratio

Debt Ratio = Total Liabilities / Net Worth

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