How to Calculate Net Worth?
Before we get to our topic, which is about calculating the net worth of an individual, we must focus on two major aspects, namely ‘Assets’ and ‘Liabilities’. So, what exactly are Assets and Liabilities?
Assets – Assets are things that you own, which contribute to your wealth. Some of the examples for assets have been given below.
- Real Estate properties, which include your primary residence and any other properties.
- Automobiles or other vehicles.
- Personal property such as antiques and jewelry.
Money in bank accounts such as savings accounts, deposit accounts, etc.
- Financial instruments related to investment such as bonds, ETFs, cryptos, etc.
Liabilities – Liabilities are the things that you owe to somebody (a financial institution or just a person). Some examples of liabilities are listed below.
- Credit Card debt
- Personal loan
- Loan from a friend or family member
- Student loan
- Any other debt or loan
List all your assets and liabilities, and subtract your assets from your liabilities, the number you get would be your ‘Personal Net Worth’. The same would apply to companies or organizations as well. The net worth of a company might also be called shareholders’ equity because deducting all the liabilities would generally mean the value of the total shares in a company at that time.
When a company wants to pay off its shareholders, it would have to determine its net worth first. Usually, companies pay off their shareholders when they bankrupt or want to end their business. When such a time comes, a company pays off all its debts (liabilities) before getting to the stakeholders.
Example – Let us see an example of personal net worth so that we can have a better understanding of the topic. For this, we assume the following assets and liabilities are of a person named ‘Tony’
Primary Residence – $200,000
Automobile #1 – $10,000
Automobile #2 – $30,000
Motorcycle – $5,000
Retirement Account – $10,000
Investments – $5,000
Rainy day funds – $5,000
Savings Account – $5,000
Other Bank Accounts – $5,000
Mortgage – $150,000
Vehicle loan – $10,000
Credit card dues – $5,000
Other debts – $10,000
Now add all the assets and remove the liabilities from them to calculate the net worth of Tony.
Total assets = $275,000
Total liabilities = $175,000
Now, $275,000 – $175,000 = $100,000
Based on what we calculated, Tony has a net worth of $100,000.
Negative net worth – when the assets of a person are worth less than their liabilities. This literally means that a person owes more than what he/she owns. Negative net worth doesn’t always have to imply that a person is financially broke or irresponsible, it means that they are having a hard time at that period.
Improving financially with the help of net worth – Net worth is a volatile aspect, which means that it would fluctuate on a regular basis. However, a person can manage their net worth by paying attention to their finances.
Your net worth determines your current financial situation, and it does not provide information regarding your cash flow or expenses/income. However, net worth can be a contributing factor for dealing with your long-term financial objectives. After calculating your net worth, you can easily know about the aspects that are obstructing your financial growth.
For instance, when a mortgage is more than the present market value of the primary residence, it would mean that the person owes more than what he owns. This situation would become normal with the increasing market value of the house over time.
In most cases, student loans are the biggest form of liabilities. By setting a monthly budget and opting for frugal living, a person can save more money and contribute towards their monthly loan payments or make an investment. People can also opt for additional sources of income such as passive investing or opting for a part-time job such as becoming a freelancer.
Taking other factors such as car loans and credit card bills is also very crucial while managing the net worth. It would be considered as a better idea if you spend on things that are essential for you instead of spending irresponsibly. For example, buying a lavish car might make you look cool among your friends and family, yet, you are the one responsible for making payments for it. If you buy a comparatively small car, the loan can be paid off within a short period of time. You can even save money after that and invest it in profitable opportunities so that you can make more money. And if everything goes well, you might even buy a lavish car in the future by paying all the money upfront.
Tracking the progress – every time you track your net worth, it is suggested you do it on the same day every month so that you can compare your financial performance in a perfect way. Why should you do so? The possibility of having more money is higher at the beginning of a month compared to the end of a month. Additionally, you might have more monthly payments in the beginning when compared to the end of the month when you’ve paid them. By doing it on the same day every time you do it, you can assess your overall financial situation in a good manner.
Bottom line – By regularly keeping track of your financial progress and calculating your net worth is a very important aspect of your financial wellbeing. One should always remember that net worth can be a crucial indicator of determining a financial situation, however, it does not provide a deep insight into the entire financial situation.
For example, a person having a huge loan with low interest rates is in a better financial scenario compared to a person having a relatively smaller loan with high interest rates. Nonetheless, when you calculate the net worth of both individuals, you might get a different idea of their financial situation.
We hope that you were able to find all the relevant information regarding net worth with the help of this article. We also wish for you to have a good financial career along with a considerable amount of net worth.