Analysing Your Net Worth
On this page, you will:
- learn how to analyze your net worth.
Your personal net worth measures your financial position.
Net Worth.
In our Net Worth Calculation Example, the net worth is $10,390. This means that after you sell all your assets and pay back pay all your debt, you will still have surplus money of $10,390.
If on the other hand you have a negative net worth, say -$5,000 this means that even if you sell all your assets, you still do not have enough to settle all your debts. You will still owe $5,000. Therefore it is better to have positive net worth. The higher your net worth, the wealthier you will be.
Asset Debt Ratio
The Asset Debt Ratio can show how comfortable or dangerous your current financial position. To find the Asset Debt Ratio, use Total Asset divided by Total Debt. Then multiply by negative 1 to get a positive ratio.
If the ratio is:
- Less than 0.80: You are owning more debt than asset. You need to come up with a debt reduction plan. The longer you delay, the deeper you will sink. Seek professional guidance if necessary.
- Between 0.81 to 0.99: Examine how you ended up having more debt than asset. Was it because of a bad investment decision? Or a compulsive spending spree? Learn from your mistakes and you won't sink deeper into debt.
- Between 1.0 to 1.5: Your asset is 1 to 1.5 times your debt. There is nothing to worry about. Aim to build higher net worth.
It is possible to have an Asset Debt Ratio of hundreds or even thousands. This usually happens when you own some investments (ie. house) and have paid off your debt (ie. mortgage). The sky is your limit.
Next: Prioritizing Your Expenses.
Previous: Building Your Net Worth Statement.