Net worth meaning:
Net worth is a tool to know the financial value. The net worth of any entity is the sum of its assets minus the sum of its liabilities.
- Positive net worth denotes that the entity has more assets than liabilities.
- Negative net worth denotes that entity has more liabilities than assets, therefore entity is in debt.
Individual net worth is total cash you will receive on selling off your assets and after paying all your liabilities. Net worth is usually used to measure a person or an entities’ financial health, as it discloses the current financial position. You must be thinking what are assets and liabilities, let us learn and understand what these are:
Asset is a resource that helps generate profit in your business. It adds money to pocket of any entity or individual. The more the assets overweight the liabilities, stronger the financial health and vice versa. An asset includes the following:
- Real estate
- Office equipment
Liabilities are obligations that your business needs to fulfill. It decreases the money of any entity or individual. The more the liability, weaker will be the financial health and vice versa. Liabilities include the following:
- Personal loans
- Home loans
- Taxes owed
- Money owed to suppliers/accounts payable
How to Calculate Net Worth?
Calculating net worth is a simple process; it requires all information relating to your assets and liabilities. Gathering information can be a bit tedious, but ensure that you have access to the information you require. Net worth helps you to know your financial health.
Let’s look into how to find net worth:
Calculate Your Assets:
- List your assets by including:
- Value of your home
- Value of any real estate property
- Value of vehicles like cars
- Value of your business (if a businessman)
- Gather the latest statement for more liquid assets which include saving accounts, cash, other investment accounts, etc.
- List other personal items that may be of value, which include jewellery, coin collections, musical instruments, etc.
- Now add all the assets you have listed, this represents total assets
- List your assets by including:
Calculate Your Liabilities:
- List all your major outstanding liabilities like the balance on your mortgage or car loans List these loans with their current balances
- Now, list all your personal liabilities like credit cards, education or student loans or any other debt you may owe
- Add all liabilities that you have listed, this represents total liabilities
Calculate Your Net Worth:
- Simply subtract the total liabilities from the total assets irrespective of how big or small the number is
- The positive or negative number represents the total net worth
- Repeat this process once a year and compare with the previous year’s number to find out whether you are making profits or you are getting behind on your goals
Net worth = Total Assets - Total Liabilities
Theoretically, net worth is nothing but the value in cash you would have if you sell all your assets and pay off all your liabilities. In some cases, the number is negative which indicates that you have more in liabilities than assets.
Why Calculate A Net Worth Statement?
Net worth gives you a clear understanding of your financial position which may help to make a better informed decision. Below are some benefits:
- Calculating personal net worth is the best way of knowing the starting point and how far you need to travel to achieve your long term financial goals
- As by knowing the current net worth it becomes very easier, it helps in setting financial goals and identifying problematic areas
- Growing and tracking positive net worth not just keeps a positive financial course but also helps in availing loans and more attractive credit terms
Every person has their own long term or short term financial goals which they wish to fulfil, like owning your home, paying for children’s education fees, your retirement, and financial independence, etc. These financial goals can only be attained by growing net worth.
If the net worth calculation is gradually increasing every year then you are on the right path whereas if it is declining or is holding steady you must start identifying the loopholes, causes and know how you can improve your financial condition.
Net Worth Calculator - FAQs
+What is net worth?
A net worth statement is simply your personal balance sheet; it helps you to understand where you stand financially.
+When will I need to calculate my net worth?
Net worth helps you to know your financial position therefore; it is important that every year you must calculate your net worth.
+I can’t touch my retirement accounts for 30 years. Do they count?
Your liquid assets are only one part of the net worth calculation. Even though you don’t receive a distribution from your retirement account now, it is still considered a part of your net worth.
+Do I have the same net worth as that of my spouse?
Depending on how you and your spouse manage household finances, your net worth can be identical or there can be a drastic difference like:
- If both of you are listed as co-owners of your home, share cars or credit card then those assets will be attributed to both
- If both of you have purchased vehicles separately then the vehicle on your name will be considered on your calculation
- In case you add your parents net worth to yours, you will get to know your household net worth