Net worth is defined as the total wealth of an individual, company, or household. All financial assets and liabilities are taken into account while calculating them. In other words, it is a representation of what a person or company owns minus what it owes. In simpler terms. It simply shows by how much amount our asset exceeds our liabilities.
What Is Net Worth?
For individuals, net worth refers to their economic position. This is the way to calculate it for an individual:
Net Worth = Individual Assets - Liabilities
A higher-worth unit relates to the good financial strength and ultimately a good credit rating of an individual. Example of individual assets is- retirement accounts, investments, houses, and vehicles. The liabilities mentioned above include both secured and unsecured debts. In addition to personal loans and consumer debts, a home mortgage is also counted as a liability.
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Why is it important?
Net worth is an indicator of a person’s financial stability. A thorough study can help in understanding where the money has gone in the past and where you want it to go in the future. Analyzing one’s monetary worth can help one prioritize their needs and spendings. If the money worth of a person is negative or alarmingly low they need to put a break on their spendings and make plans to bridge it.
How to calculate Net Worth
Calculation of money worth is a simple process. But it requires all the information surrounding the current assets and liabilities scenario.
- Calculation of assets-
- At first, one needs to calculate evrything they own. Start by listing all the larger assets like house, office, cars, etc. In the case of a business owner, this list would also include the value of their business.
- Moving on, calculate all the liquid assests. These assets include checking and savings accounts, cash, FDs or other investments.
- Finally, start listing other personal items of value. These could include valuable jewelry, heirlooms, or any other rare collection.
- Finally, add all the listed amounts to find the total value of your assets.
- Calculation of liabilities-
- Follow the above order and list all the major liabilities. This will include balance on your mortgage or car loans.
- Next, list all your personal liabilities such as any balance on your credit cards, student loans, etc.
- Finally, add all the listed amounts to find the total value of your liabilities.
- Final Calculation
- Last but not the least, simply subtract the total liabilities from the total assets. It doesn’t matter how big or how small the number. The number maybe negative or positive.
Also read- Neeraj Chopra Net Worth
Net worth is a representation of where one stands financially. Theoretically, it is the value in cash you would have if you were to sell everything you own and paid off all the debts.
