Many of us have investment in stock market in our financial planning and all of us wanted to reap the benefits of booming stock markets across the world.
But WAIT, before start analysing the balance sheets of companies to invest in them, one should first analyse his/her own balance sheet and analyse if he/she has a NET WORTH that can be invested in stock markets.
To arrive at your net worth, carry out the following steps.
1. Keep an emergency fund to meet financial disruption or job loss or any other critical emergency.As a thumb rule one should always have 3-6 months expenses in the emergency fund.Do not take this emergency fund into account while calculating your net worth.
2. List all your assets. These can be stocks,savings deposit,fixed deposit,post office deposits,life insurance sum assured,mutual funds,gold,real estate. Classify the assets as liquid and illiquid assets.
What is Liquidity?
Liquidity is the ability to convert an asset into cash quickly. Stocks,savings deposit are highly liquid assets whereas real estate is a illiquid asset since it will take more time to convert the asset to cash.
3. List all your liabilities. These include credit education loan,card payments,personal loan,home loan and all other types of consumer loans.This can also include personal financial commitments like paying your parents monthly.
4. Net worth = Assets - Liablities.
If Net worth is positive, you have surplus and you can invest a portion of surplus or entire surplus in stocks from a longer term perspective.
If Net worth is negative, you have some homework to do in terms of bringing the net worth to the positive and then plan for your stock market investments.
Learn More - How to pick a stock