What is Net Worth and What are its Types? | Which Type of Net Worth Individuals Should Use for Financial Planning?￼2 min read
In this article, we will be discussing Networth, its types, and how & which type of Net Worth should be used by an Individual in attaining Financial Planning. So, Let’s get started!
- In a simpler term, Net Worth refers to the difference between the assets and liabilities of an individual.
- Net Worth shows the financial health of the individual which presents the assets being owned by the individual/company and liability being owe to others as well.
Types of Net Worth:
1) Liquid Net Worth:
- Liquid Net Worth is also termed Free Net Worth. These are those assets that only cover liquid assets that do not have any lock-in periods like Cash, Stocks, Mutual Funds (Except ELSS), FDs, Bank accounts, etc.
- Liquid Net Worth can be calculated by subtracting liabilities from the Liquid Assets amount.
- This will help you understand the system of liquid net worth.
2) Net Worth:
- Net Worth is the general term that is being used. It includes all kinds of assets whether liquid or illiquid like Employee Provident Fund (EPF), Real Estate (apart from residential homes), Cash, Stocks, Mutual Funds (Including ELSS), etc.
- It can be calculated by subtracting the Liability amount from the total asset amount.
3) Total or Full Net Worth:
- Total Net Worth includes every asset which is being covered in Net Worth plus it will also cover depreciating assets like Car, Furniture, etc. It also includes Jewelry, Own Home, etc.
- This Net Worth type is not generally being used in financial planning.
4) Maybe Net Worth:
- This is that kind of Net Worth that includes the assets which could become part of net worth in the coming period. Here, there is just a possibility of upcoming assets, they may not arrive also, hence, it should not be included while doing financial planning.
- Example: Expectation of loan repayment given to a friend or a family, Inheritance, Property in stock or dispute, etc.
What Should an Individual Do?
Among all the 4 types of Net Worth, the Net Worth is the only type that should be generally followed by the individuals based on its approach to calculating actual assets and liabilities. Net Worth is a tool that gives an overall sense of an individual’s financial health and hence one should carefully calculate his/her Net Worthwhile doing financial planning.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.