NET WORTH

In this article, you will learn more about net worth;  what it means, how to calculate it and examples.

The meaning of net worth

  Net worth is value that can be in the form of money, such as cash, or other assets, such as gold, and is the difference between total assets and total liabilities.  For individuals and businesses, this value is considered a fundamental measure of financial health and increases over time.

Owned items such as cash, investments, and property are called assets.  What a person owes someone else is called a debt.  These projects can be short or long term commitments.  Short-term examples are rent or utilities, while long-term liabilities are mortgages or loans.

   OWN NET WORTH

     Simply put, net worth simply refers to how much money a person or family would have left if they sold their assets and used the proceeds to pay off any debt they had.  There are two kinds of everything one has;  typical assets and typical liabilities.  Typical personal finance assets are real estate, vehicles, investments, and cash, while typical liabilities include mortgages, auto loans, and credit card debt.

     HOW TO CALCULATE EQUITY

     The net worth formula is:

     Net Assets equals Total Assets minus Total Liabilities

     To calculate your net worth, add up all of your assets, which can be anything you own that has value and can be turned into cash.  Then add any liabilities that include debts to either reporting entity.  The sum of all liabilities can then be subtracted from the sum of all assets to arrive at net worth.

     WHAT IS INCLUDED IN NET WORTH

     Assets included in net worth are:

     Cash, investments, real estate, vehicles, personal property, mortgages, car loans, student loans, credit card balances and medical bills.

     ARE STOCKS PART OF NET WORTH?

     Stocks are part of net worth because they are assets, meaning they have value and can be turned into cash.  Like domestic stocks, other investment securities such as stocks and bonds, mutual funds, and ETFs are often one of the largest assets in an individual’s net worth.

     What are the things that are not included in a net worth?

     Items not included in an individual’s net worth include income, current year taxes, items that may not be convertible to cash, and certain recurring financial obligations. These things not included in net worth are:

     Income, current year taxes, items with little or no cash value, rent, utilities (phone, hydro, water, cable, internet, streaming) and insurance premiums.

     NEGATIVE EQUITY

     Net worth can be negative when the value of total liabilities exceeds the value of total assets, meaning that the amount owed is greater than the amount held.  In personal finance, a negative net worth can sometimes indicate a poor financial situation.

     For example, it is common for young people to have no investments or real estate, but they may have credit card debt and car loans. 

This net deficit may be temporary and not of concern.  An extreme and unusual equity shortfall, where a major asset like a home is worth less than what you owe on your mortgage, can signal a risk of bankruptcy.

     Finally, net worth is equal to assets minus liabilities or debts and can be calculated for an individual or a business.  This calculation is a basic measure of financial health. 

For companies, net worth is referred to as book value or shareholder value, and investors can calculate this measure when considering buying shares of a company.

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