TWO ILLUSTRATIONS TO PROVE WHY NET WORTH IS IMPORTANT
Scenario #1: You’ve been working fulltime for just under a year at your first job, and you managed to save a total of Dh6,000. However, you still owe Dh25,000 in education loans, which is regularly being paid off at Dh1,000 per month.
■ Your assets: Dh6,000 cash savings
■ Your liabilities: Dh25,000 student loans
■ Your net worth: -Dh15,000
Here’s what Naish recommends: “By seeing that your total net worth is actually negative, your priorities are pretty clear over the next two years till your loan is being paid off. You’re probably most focused on your job that allows you to save for retirement while paying off your student loans.”
Scenario #2: You are a homeowner. Your home is worth Dh350,000 in the current market. You have Dh250,000 left to pay on your mortgage, and you have a credit card balance of Dh10,000. Your mortgage has an APR of 3.25 per cent and your credit card charges 19.99 per cent.
You want to sell your house, but it needs repairs. You have Dh10,000 in cash savings and
Dh30,000 in retirement fund. Your income is enough to pay all your bills, and you have a bit of cash left over each month.
■ Your assets: Dh10,000 savings; home valued at Dh350,000; Dh30,000 in retirement fund
■ Your liabilities: Dh10,000 credit card balance; Dh250,000 mortgage
■ Your net worth: Dh130,000
The above net worth calculation is not as straightforward as the first. There are many factors at play, including the value of the house and whether or not an owner can sell it for what it’s worth. Housing valuations change all the time. Likewise, the balance of your retirement fund can fluctuate overnight based on the stock market.
The above homeowner has some choices to face: If they want to grow their net worth, should they invest in renovations to make their house more valuable? Or should they pay down their highinterest credit card first? Here’s what Naish recommends doing:
“Since the interest on their credit card is so high, it may be wise to knock that out using a portion of their Dh10,000 savings, especially since they could use their left over cash every month to rebuild their savings.”
There are many factors at play, including the value of the house and whether or not an owner can sell it for what it’s worth.