As of writing this article, the net worth of the richest man in the world stood at roughly $193 billion. We often marvel at these things. You know, the ongoing battle for the number one spot between Jeff Bezos and Elon Musk. The question though remains the same. How does calculating your net worth work?
Net worth is calculated by deducting all your assets from your liabilities. That’s the easy answer.
However, there is so much more to learn. What are the types of net worth? What can really be considered to be an asset or a liability? How do you keep your net worth moving in the right direction?
If you have ever thought about this and didn’t come up with any real answer, then you are in the right place. We’ll give you a complete guide on how net worth is calculated and how you can also calculate yours.
What Is The Meaning Of Net Worth?
Net worth is simply everything you own. It starts from your house to the cash in the bank to your company. It’s literally everything that has your name on it. Well, that’s only half of the story. Your liabilities are deducted from your total assets to get your real net worth.
So, in other words, your net worth is all that you own without the expenses or the loan you have been owing. It’s the true and complete value of all your assets.
You can also put it this way. Your net worth is the cash you’ll have if you sold everything that you own. It’s really that simple.
Positive and Negative Net worth
Depending on where you stand, your net worth can either be positive or negative. Your net worth is positive when you have assets that are more than your liabilities. It’s negative when you have liabilities that are more than your assets.
Most businesses and financial institutions see positive signs when issuing out loans or credit cards. When you have a negative net worth, it might be a sign that you are in financial trouble. Negative net worth can also be a sign that bankruptcy might just be around the corner.
There are some situations though where it can be normal for you to have a negative net worth. For example, students who are weighed down by student loans will almost always have a negative net worth when they leave school.
Calculating Your Net Worth- Business and Personal Finance
Net worth can also be roughly divided into two. These are the business and personal finance categories. The business net worth simply refers to the companies. The equity held by a shareholder is the contributing factor here. The net worth follows the same trend of calculation. The value of the net worth is the total after liabilities have been deducted from your assets.
For businesses, a balance sheet is often used to calculate net worth. There are several reasons why the net worth of a business is important. First, it’s the first place lenders look when they want to loan the businesses.
If a business has a negative net worth, then it might simply not make the cut. Positive net worth will also affect the stock price of a company positively. This means better management of funds of a company will always see it grow in the right direction.
When it comes to personal finance, it’s more of what we already know. It’s more of the net worth of a single person. Net worth here follows the same pattern of deduction of liabilities from assets.
Here are some of the best examples of liabilities that someone can incur.
- Credit cards
- Loans such as student or car loans
Some assets that can easily be incurred include
- Bank Accounts
- Real estate
Calculating your Net Worth
So how is net worth calculated? That is still the million-dollar question. It’s a fairly easy process. We are going to make it even easier for you to understand. This will allow you to know how much you are worth to the very last penny.
Step One- Create a Comprehensive List Starting With Your Biggest Assets
The first thing you have to do is to make a list of all your assets. To make sure it looks organized and easy to add up, you might want to start with your largest assets and make your way down. Here are some of the things you should probably add to this list
· Your Bank Account Balance
You will have to add what you have to your bank account. For this category, you should be extremely specific. Bank accounts come with numbers or figures. So, this should be easy to pull off.
· Bonds and Securities
You should also add your stocks, bonds, shares, and any other securities that you might have acquired during your lifetime.
The cars and other automobiles you have also count as your assets. While some writers might refer to cars as a liability, automobiles are still your property and should be counted. We would rather prefer to place it under a depreciating asset.
A depreciating asset refers to assets that have lost their initial value. This simply means that when calculating the value of a car, you have to be realistic and estimate the current value.
Apart from your bank account, you should understand that most assets will fall under the non-specific amount section. This means that a rough realistic estimate will need to be drawn to know their current value.
Step Two- Gathering Your Liabilities
Next up, you have to calculate your liabilities. Just like the assets, it’s always good to keep the bigger liabilities at the top of the chart.
Here are some things that must definitely go under the liability charts.
If you have a mortgage with any bank, you should place it under the liability section. This includes any interest that remains payable. Mortgages are a big part of the liability section.
All types of loans that you must have incurred must also be added to this section. This includes student loans, auto loans, personal loans and so much more. Make sure that you do not forget a single one. It’s also a good practice to add the interest payable to the loan.
· Credit Card
If you have a credit card, you should add its balance to the liability section. A credit card is not an asset.
Step Three- Add Things That Have Value
Items that you probably have that have some value should also be added to your assets. Items with personal value are quite broad. Here are some things that might qualify as items with personal value.
- Historical items
To get a good idea of what should be included in this list, we should limit the total value to at least $600.
Step Four- Do the Math
The last step you’ll need to follow would be to do the math. All you have to do is to subtract the liabilities from your assets. Once this has been done, you should see your true net worth.
Average Net Worth in the United States
According to the CNBC, the median average of net worth in the United States varies largely depending on the age of the individual used.
Persons who are less than 35 years has a median average of $13,900 as their net worth. The average amount for that age also stands at $76300.
The age classification with the highest average net worth were 65-74 years. Unsurprisingly, these were people who had just retired from their careers. The median net worth stood at $266,400. The average for that group stood at $1,217,700.
This was closely followed by persons between the ages of 55-64. The median net worth of this group stood at $212,500.
Household net worth by age
|Age of head of family||Median net worth||Average net worth|
|Less than 35||$13900||$76300|
Why You Should Know How to Calculate Your Net Worth
So now that we have been able to answer the how is net worth calculated question, it’s time to answer another question. Why should I even know my net worth in the first place?
1. It Helps With Money Management
A simple way to tell if your money management skills are off the charts is to calculate your net worth. After all, the net worth is a great way to tell if you are in debt or not. It also helps you reposition yourself if you have done badly with money in recent times.
2. It Helps You Secure a Loan
Planning on taking a loan soon? Having a good idea of your assets will help you to secure a good loan. The truth is that most financial institutions are going to be highly suspicious if you have a negative net worth or something even close.
3. It Helps You Clear Your Debts
Calculating your net worth allows you to make arrangements to clear your debts. Without knowing exactly where you stand, none of this will be possible.
4. Buying a New Home
In the United States, mortgage rates are relatively low. This might be a good time to buy a new house. Knowing how your assets are doing will give you an idea if you can buy a house. So, you should probably calculate your net worth right now.
5. It Is the First Step towards Financial Independence
For many people today, financial independence is the ultimate goal. However, the only way to get there is to have enough investments and assets. Calculating your net worth gives you the precise amount you have and allows you to plan for the future.
It also allows you to make adjustments to meet your targets if your net worth isn’t where you would like it to be.
Calculating your net worth is truly a great way to set yourself up for future success.