Abhinav Mittal, an Indian resident in the UAE, and his wife arrived in Dubai in 2014. Despite being enticed by the lure of luxury living, he always kept in mind veteran investor Warren Buffett’s words: “If you buy things you do not need, soon you will have to sell things you need.”
This grounded him and guided his spending decisions, the author and independent technology cost optimisation adviser recalls.
“Following the F.I.R.E. [Financial Independence, Retire Early] philosophy, I embraced a minimalist lifestyle. I focused on spending only on essentials and avoided the trap of lifestyle inflation, even as my earnings increased,” Mr Mittal, 39, says.
“I allowed my savings to grow in low-risk investments, safeguarding [the] principal while hedging against economic inflation.
“To keep my expenses in check, I diligently tracked every dirham spent using a mobile app. I paid my credit card bills in full and avoided late payments, traffic fines, all of which contributed to improving my net worth.”
Net worth is a financial metric that represents the total value of an individual’s assets minus their liabilities. In simple terms, it’s what you own minus what you owe.
Only 35 per cent of US adults are confident they understand what “net worth” means, even though 91 per cent have heard of it, according to a survey of 2,029 people conducted last year by financial services company Empower.
About three quarters (74 per cent) of US adults do not think it is likely they will ever achieve their definition of a “high” net worth, the results found.
Why does net worth matter?
Net worth provides a snapshot of your financial health and can be used to gauge whether you are financially stable, in debt or capable of meeting your financial goals, explains Joseph El Am, general manager of digital wealth manager StashAway Mena.
Similarly, Dheeraj Satta, an Indian business head at UAE car-sharing platform ekar, says he educated himself on finance, honed his skills and embraced a frugal lifestyle.
His net worth steadily climbed through strategic investments and as he took calculated risks.
We spoke to personal finance experts who explain why it's important to know your net worth.
How to calculate net worth
Start by listing all of your assets. Assets are anything you own that has monetary value. This includes cash, bank deposits, investments (stocks, bonds, mutual funds, retirement accounts), real estate (primary residence, investment properties), cryptocurrency, collectibles, personal effects (cars, jewellery), business ownership, pension and retirement policies, says Mr El Am.
Add up the value of all assets you have listed to get your total assets. Then, list all your liabilities, which are debts or financial obligations. This includes mortgage(s), car loans, credit card debts, personal loans and taxes due, if any.
“Add up the value of all the liabilities you have listed to get your total liabilities. Finally, subtract your total liabilities from your total assets to get your net worth,” he says.
When your net worth is positive, it indicates that the value of what you own surpasses what you owe, typically signifying a good financial standing.
Conversely, having a negative net worth, where your debts are greater than your assets, might be an indicator that it is time to reassess and modify your financial practices, he says.
“It’s important to recognise that your net worth represents your financial state at a particular moment and can vary as your assets and debts change. Consistently monitoring your net worth is an effective strategy for overseeing your financial affairs and working towards your financial goals,” Mr El Am adds.
Due to the nature of expatriate life, the balance sheet of many may be made up of multicurrency assets/liabilities.
If this is the case, Rupert Connor, partner at Abacus Financial Services, recommends listing assets and liabilities in the individual currencies. However, there must also be a base currency tab where everything is converted and tallied up.
The base currency might be chosen as one’s home country currency or perhaps the currency of most of the assets/liabilities, he says.
Why is it important to know your net worth?
Most people have a goal and if you don’t, you should start there, suggests Rasheda Khatun Khan, financial wellness expert and author of Millionaire Mindset – 6 Steps To A Wealthy Life.
Knowing what you want and then calculating the cost of that goal is the starting point. Knowing your net worth will simply tell you how close or far you are to your goal, she says.
“Remember to separate your net worth into all your goals. This way, you will know where you are with each of your goals, especially as your goals may have different timelines,” she says.
“Knowing where you are with each goal will determine how much more you need as boosting your net worth is only possible if you know the reason for it. This will give you the emotional pull to keep taking action.”
Knowing your net worth helps in setting realistic financial goals, be it saving for retirement, buying a home or paying off debts, according to StashAway’s Mr El Am.
It aids in creating a financial plan that aligns with your goals.
“When you’re aware of your net worth, you can make better informed investment decisions. Knowing how much capital you have at your disposal can help you decide how much you can afford to invest and in what types of investments,” he says.
“It also helps you understand how well-prepared you are for emergencies. It helps you evaluate if your emergency fund is large enough to be used when needed. You should typically have six to nine months of living expenses in your emergency fund.”
Knowing your net worth can also influence financial behaviour. It can motivate you to save more, spend wisely and avoid unnecessary debts when you see positive changes, or prompt you to adjust if your net worth is declining, Mr El Am points out.
Meanwhile, knowing your net worth when taking out secured debt, like a mortgage, for example, makes lenders feel more comfortable lending to you, as you have put forward some skin in the game, says Sophia Bhatti, chief executive of Dubai-based Wimbledon Wealth.
Having assets, knowing where they are and what they are worth are green flags lenders look for in a customer, she says.
Mr Connor warns that it is also important for one to know their net worth as there maybe implications in their home country upon death and how their estate is passed on.
“For example, British individuals with UK pension trusts can reduce their total net asset value by the value of the pension, as it will not form part of their estate for UK inheritance tax purposes,” he says.
“British people with life insurance policies must ensure that they are written into trust, otherwise the proceeds of any claim paid out will add that amount to the deceased estate and could be potentially taxed at 40 per cent.”
How to boost your net worth
The easiest way to boost your net worth is to have more assets and less debt, Ms Bhatti says.
A few tips are to overpay your debt as it reduces the amount of interest you will pay in the long run and avoid expensive forms of debt where possible, she says.
Credit cards are not your friend if you plan on keeping the debt for a long period of time. The interest will eat into your cash, lowering your net worth, she adds.
Mr El Am says one must create a budget to track their income and expenses, use extra money to pay off debt or invest and focus on paying off high-interest debts such as credit card debts or personal loans.
They should also build an emergency fund, invest in a diversified portfolio of assets that have a high chance of appreciating over time and take on side hustles to generate additional income, which contributes to increasing your net worth.
Saving and investing is how one’s net worth is built, according to Mr Connor.
“One can build wealth without a high income, but have no chance of building wealth without a high savings rate,” he says.
“It is by saving that individuals build wealth and, therefore, be able to afford deposits on properties, invest in growth assets and contribute to retirement schemes.”
Ms Khatun Khan says the biggest reason people fail in their financial goals is because they did not commit to saving and investing and the only reason people are not consistent is because their “why” for doing it is not big enough and not emotional enough.
Once your reason becomes a “must do”, only then can you boost your net worth by prioritising your savings. Saving more plus investing more equals having more, she adds.