Tracking your net worth improves your financial health

Dubai: While net worth is often associated with the wealthy, tracking your own financial standing is just as important. Your net worth provides a snapshot of your financial health, helping you make better spending and saving choices. Here's why it's essential and how to calculate and monitor it.

Net worth is the difference between what you own (assets) and what you owe (liabilities). It gives a clear picture of your financial situation. Assets include cash, investments, real estate, and even things like collectibles or cryptocurrencies. Liabilities are your debts, including loans, credit card balances, and mortgages.

Tracking your net worth helps you understand where you can improve your finances. As Mohammad Shaan, a Dubai-based wealth manager, explains, “Knowing your net worth helps you identify where you're overspending and control unnecessary debt.” It also keeps you in check with whether a purchase is essential or just a desire, helping you avoid unnecessary debt.

Additionally, keeping track of your net worth ensures you're prepared for unexpected expenses by holding funds in liquid assets, such as cash or easily sellable investments.

Follow these simple steps to calculate your net worth:

When calculating assets, consider how easily you can sell them for cash (liquidity). Cash is the most liquid, while real estate or investments may take longer to sell. Liabilities, like mortgages or credit card debts, need to be tracked as they grow over time.

Estimate how your assets and liabilities will grow annually. For assets like stocks or real estate, a 7% growth rate is a conservative assumption. Liabilities, such as loans, may have fixed growth rates based on interest, but debts like credit cards or student loans can grow more quickly if not paid off regularly.

Scenario 1:
You’ve saved Dh6,000 but owe Dh25,000 in student loans.

In this case, a negative net worth shows that focusing on paying off the student loan should be a priority.

Scenario 2:
You own a home worth Dh350,000, with Dh250,000 left on the mortgage and Dh10,000 in credit card debt.

In this scenario, it might be best to pay off the high-interest credit card first to improve your financial standing.

Tracking your net worth is essential for making informed financial decisions. It helps you manage debt and grow your savings. Shaan points out that “your net worth reflects your financial health, beyond just your income,” highlighting the importance of how you manage your money.

In conclusion, regularly tracking your net worth helps you take control of your finances and make smarter decisions. By understanding where you stand, you can reduce debt and work toward a more secure financial future.