Achieve Financial Clarity: Using Excel to Calculate Net Worth and Key Financial Ratios

Introduction: In personal finance, understanding your asset, liability, and net worth is crucial for making informed financial decisions. Excel is a powerful tool that can help streamline this process. This guide will walk you through setting up an Excel sheet to determine your financial standing, including net investible assets, debt servicing ratio, savings ratio, and liquidity/expense ratio.

Step 1: Setting Up the Asset and Liability Worksheet

1. Open a new Excel spreadsheet and create the following column headers:
   • A1: Asset Category
   • B1: Asset Value
   • C1: Liability Category
   • D1: Liability Value
2. List all your assets (cash, investments, real estate, etc.) under column A and their corresponding values under column B.
3. List all your liabilities (loans, credit card debt, mortgages, etc.) under column C and their corresponding values under column D.

Step 2: Calculating Net Worth

1. In a new cell, use the formula:

   =SUM(B2:Bn)-SUM(D2:Dn)
   

   • This formula subtracts total liabilities from total assets to determine net worth.

Step 3: Determining Net Investible Assets Net investible assets refer to the liquid and semi-liquid assets that can be used for investment purposes.

1. Identify and sum up investible assets such as savings, stocks, bonds, and mutual funds:

   =SUM(B2, B4, B5)  
   

   (where B2, B4, and B5 represent rows with investible assets.)
2. Deduct any short-term liabilities:

   =SUM(B2, B4, B5) - SUM(D2, D3)
   

Step 4: Computing the Debt Servicing Ratio (DSR) Debt servicing ratio helps in understanding your financial obligations relative to income.

1. Input total monthly debt payments in a cell (e.g., E2) and total monthly income in another (E3).
2. Use the formula:

   =E2/E3
   

   • A lower ratio indicates better financial health.

Step 5: Calculating the Savings Ratio The savings ratio determines how much of your income is being saved.

1. Input total monthly savings (F2) and total monthly income (F3).
2. Use the formula:

   =F2/F3
   

   • A higher savings ratio is preferable.

Step 6: Calculating the Liquidity/Expense Ratio The liquidity/expense ratio measures the ability to cover expenses using liquid assets.

1. Input total liquid assets (G2) and total monthly expenses (G3).
2. Use the formula:

   =G2/G3
   

   • A ratio above 3 indicates strong financial liquidity.

Step 7: Analyzing and Interpreting Results

• If net worth is positive, financial stability is high.
• A DSR below 30% is considered healthy.
• A savings ratio above 20% is ideal for long-term financial security.
• A liquidity/expense ratio above 3 suggests strong financial liquidity.

Complicated Net Worth Example and Analysis: Example Scenario: John has the following financial details:

• Assets:

  • Cash: $10,000
  • Stocks: $50,000
  • Real Estate: $300,000
  • Retirement Funds: $100,000
  • Car: $20,000

• Liabilities:

  • Mortgage: $200,000
  • Car Loan: $10,000
  • Credit Card Debt: $5,000
  • Student Loan: $25,000

Using the formula:

=SUM(10000, 50000, 300000, 100000, 20000) - SUM(200000, 10000, 5000, 25000)

John’s net worth is:

= $480,000 - $240,000 = $240,000

Debt Servicing Ratio (DSR) Analysis: John’s monthly income is $8,000, and his monthly debt payments are $2,400.

= 2400 / 8000

DSR = 30%, which is at the upper limit of a healthy financial standing.

Savings Ratio Analysis: John saves $2,000 per month.

= 2000 / 8000

Savings Ratio = 25%, indicating a good saving habit.

Liquidity/Expense Ratio Analysis: John’s total liquid assets (cash + stocks) are $60,000, and his monthly expenses are $6,000.

= 60000 / 6000

Liquidity/Expense Ratio = 10, which indicates very strong liquidity.

Conclusion: By using Excel to track assets, liabilities, and financial ratios such as net worth, debt servicing ratio, savings ratio, and liquidity/expense ratio, individuals can gain deeper insights into their financial standing. Maintaining a positive net worth, managing debt effectively, saving consistently, and ensuring liquidity for emergencies are essential steps toward financial stability and growth. Mastering these formulas will empower individuals to make informed financial decisions and improve overall financial health.