One term that pops up frequently in financial and economic circles is net worth. But what exactly does it mean? Net worth is a monetary term that refers to the overall value of assets that an individual or a company owns. More specifically, net worth is the amount of wealth you have after taking your liabilities into account.
Essentially, it’s like a report card that provides a general snapshot of how a particular party is fairing finance-wise. Every person, couple, company, and even every nation, too, has a net worth.
Net worth is not the same as your income. The former applies to any accumulated wealth over an extended period, while the latter is simply the wages you receive from working day to day. To build up wealth, saving and investing are two main strategies. A sizable income doesn’t guarantee a high net worth. Rather, working hard and working smart are the steps needed to travel down that road.
Read on to learn more about net worth, how it applies to you, and how you can calculate it.
Types of net worth
Two main types of net worth exist: net worth in business and net worth in personal finance.
Net worth in business
Experts refer to this as book value or shareholders’ equity. Moneylenders consider this value before investing or partnering with a company. The higher the net worth of a business, the more confidence the lenders will have that they will pay back a loan.
Typically, a company’s net worth will rise or fall in accordance with the value of its stocks.
In personal finance
This simply refers to the net worth of a single individual.
Individuals with high net worth are those who have accumulated a substantial amount of wealth. Bill Gates, Elon Musk, and Jeff Bezos are three extremely well-known examples.
How does net worth work?
Net worth is an important value to be aware of, as it can help you know how you are spending your money and where you may need to make adjustments. Tracking your net worth over time is an intelligent way to develop a comprehensive picture of your financial situation.
In 2019, the average net worth of an American family was $748,800.
It's worth noting that net worth is not a stable number. It will fluctuate as time goes on, just like your income and expenses, and just as market values rise and fall.
Net worth calculation formula
You can determine your net worth simply by subtracting your liabilities from your assets.
An asset is anything that has monetary value. Examples include personal saving accounts, owned property, or art. A liability is any financial obligation that reduces your resources, such as a mortgage, utility bills, student loans, and credit card balances.
The steps to calculating your net worth are as follows:
Step 1: Calculate your total assets.
Start by gathering your most considerable assets like properties, boats, or automobiles. Next, round up your liquid assets like money in your savings account and other investments. Thirdly, do the same for your smaller assets, such as jewelry or coin collections. Add all these together to find the total sum.
Step 2: Calculate your total liabilities.
Again, start with the largest detriments, like mortgages and outstanding loans.
Step 3: Subtract your total assets from your total liabilities.
The resulting value is your net worth. Never overestimate the value of your possessions as you do this. You’ll create a more accurate picture if you are reserved with your numbers.
Net worth can either be positive, meaning that the value of your assets is greater than your liabilities, or it can be negative, meaning that your assets are less than your liabilities. A positive net worth indicates good financial health. However, it is necessary to keep in mind that starting out with a negative net worth is not uncommon, as many young people have student loans, for instance, and it takes time to establish wealth.
Many online calculation platforms exist that you can use to determine net worth as well.
Examples of net worth
Net worth can be calculated in relation to several factors, including age, education level, familial structure, race, and ethnicity. Read on to see the breakdown of each relationship according to statistics gathered in 2019.
Net worth in relation to age
Net worth in relation to education level
Net worth in relation to family structure
Net worth in relation to race and ethnicity
Four ways to raise your net worth
There are always strategies to improve your financial circumstances, and increasing your net worth is no different. Read on to learn more ways to get ahead in the game of growing your net worth.
Tip 1: Pay your debts. The less debt you have, the fewer liabilities you must account for in your calculations.
Tip 2: If possible, increase your income. You could consider finding a second job, asking your employer for a promotion, or starting a business on the side.
Tip 3: Add more to your retirement and investment accounts. Consistently contributing to these accounts will help the fund grow over time, as it builds interest rates.
Tip 4: Spend your money wisely. Just because you can afford to buy something doesn’t mean you need it. If you’re unsure where to start, cutting back on unnecessary purchases is a smart way to go.
There is no magic number that you need to strive for when it comes to net worth. What matters is being able to navigate the financial realm and being smart with your money and possessions. When it comes to building net worth, it’s best to have easy access to your hard-earned money. The most practical and the simplest way to do this is by using a debit card or cash instead of a credit card.
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