Networth Means, Calculation, Research, and Statement
Net worth is the value of everything you own, meaning your financial and non-financial assets, minus your total outstanding liabilities (your debts).
Your net worth can act as an indicator of your financial health, and there are several ways to measure this useful metric.
What Is Net Worth?
Your net worth is essentially a grand total of all your assets minus your liabilities.
If you're wondering what your net worth is, learn how to calculate and interpret it.
Net worth is calculated by subtracting all liabilities from assets. An asset is anything owned that has monetary value, while liabilities are obligations that deplete resources, such as loans, accounts payable, and mortgages.
Net worth can be described as either positive or negative, with the former meaning that assets exceed liabilities and the latter that liabilities exceed assets. Positive and increasing net worth indicates good financial health. Decreasing net worth, on the other hand, is cause for concern as it might signal a decrease in assets relative to liabilities.
The best way to improve net worth is to either reduce liabilities while assets stay constant or rise, or increase assets while liabilities either stay constant or fall.
Types of Net Worth
Net worth can be applied to individuals, companies, sectors, and even countries.
Net Worth in Business
In business, net worth is also known as book value or shareholders' equity. The balance sheet is also known as a net worth statement. The value of a company's equity equals the difference between the value of total assets and total liabilities. Note that the values on a company's balance sheet highlight historical costs or book values, not current market values.
Lenders scrutinize a business's net worth to determine if it is financially healthy. If total liabilities exceed total assets, a creditor may not be too confident in a company's ability to repay its loans.
A consistently profitable company will register a rising net worth or book value as long as these earnings are not fully distributed to shareholders as dividends. For a public company, a rising book value will often be accompanied by an increase in the value of its stock price.
Net Worth in Personal Finance
An individual's net worth is simply the value that is left after subtracting liabilities from assets.
Examples of liabilities, otherwise known as debt, include mortgages, credit card balances, student loans, and car loans. An individual's assets, meanwhile, include checking and savings account balances, the value of securities such as stocks or bonds, real property value, the market value of an automobile, et al. Whatever is left after selling all assets and paying off personal debt is the net worth.
Negative Net Worth
A negative net worth results if total debt is more than total assets. For instance, if the sum of an individual's credit card bills, utility bills, outstanding mortgage payments, auto loan bills, and student loans is higher than the total value of their cash and investments, net worth will be negative.
In this case, the individual may file for bankruptcy protection to eliminate some of the debt and prevent creditors from trying to collect on it. However, some liabilities, such as child support, alimony, and taxes, cannot be discharged. It’s also worth bearing in mind that a bankruptcy will stay on an individual's credit report for many years.
How to Calculate Your Net Worth?
Calculating your net worth can be a simple process, but it requires that you gather all the information surrounding your current assets and liabilities. Most financial planners recommend that their clients keep a secure folder with information on all financial assets and liabilities to be updated at least once a year.
Gathering and organizing this information can be a bit of a chore at first, but ensures that you (and anyone else who might need it like your spouse or financial advisor) have access to the information when needed.
Though such a folder can be turned into much more, calculating your net worth only requires basic financial information regarding the things you own and the debt that you owe. Here's how to get started:
Calculate Your Assets
Start by listing your largest assets. For most people, this could include the value of their home, any real estate properties, or vehicles like personal cars or boats. In the case of a business owner, this list would also include the value of their business, which has its own more complicated calculation. Make sure you use accurate estimates of market values in current dollars.
Next, you'll want to gather your latest statements for your more liquid assets. These assets include checking and savings accounts, cash, CDs, or other investments such as brokerage accounts or retirement accounts.
Finally, consider listing other personal items that may be of value. These could include valuable jewellery, coin collections, musical instruments, heirlooms, a rare wine collection, etc.
Now, take all of the assets you have listed in the first three steps and add them together. This number represents your total assets.
Calculate Your Liabilities
Again, start with the major outstanding liabilities such as the balance on your mortgage or car loans. List these loans and their most current balances.
Next, list all of your personal liabilities such as any balance on your credit cards, student loans, or any other debt you may owe.
Now, add up the balances on all of the liabilities you listed above. This number represents your total liabilities.
Calculate Your Net Worth
To calculate your net worth, simply subtract the total liabilities from the total assets. For this exercise, it doesn't matter how big or how small the number. It doesn't necessarily matter if the number is negative. Your net worth is just a starting point to have something to compare against in the future.
Repeat this process at least once a year and compare it with the previous year's number. By comparing the two, you can then determine if you are making progress or getting further behind on your goals. You may want to recalculate your net worth more often if you've embarked on an aggressive savings or debt repayment plan.
Why Your Net Worth Is Important
When you see financial trends in black and white on your net worth statements, you are forced to confront the realities of where you stand financially. Reviewing your net worth statements over time can help you determine 1) where you are, and 2) how to get where you want to be. This can give you encouragement when you are heading in the right direction (i.e., reducing debt while increasing assets) and provide a wake-up call if you are not on track. Getting on track requires you some of the following below:
Spend Wisely
Knowing your net worth is important because it can help you identify areas where you spend too much money. Just because you can afford something doesn't mean you have to buy it. To keep debt from accumulating unnecessarily, consider if something is a need or a want before you make a purchase. To reduce unnecessary spending and debt, your needs should represent the majority of spending. (Keep in mind that you can falsely rationalize a want as a need.).
Pay Down Debt
Reviewing your assets and liabilities can help you develop a plan for paying down debt. For instance, you might be earning 1% interest in a money market account while paying off credit card debt at 12% interest. You may find that using the cash to pay off the credit card debt makes sense in the long run. When in doubt, crunch the numbers to see if it makes financial sense to pay down a certain debt, taking into consideration the impact of no longer having access to that cash (which you might need for emergencies).
Save and Invest
Your net worth figures can motivate you to save and invest money. If your net worth statement shows that you are on track to meet your financial goals, it can encourage you to continue what you're doing. Conversely, if your net worth indicates room for improvement (for example, over time you have dwindling assets and burgeoning liabilities), it can provide a needed spark of motivation to take a more aggressive approach to saving and investing your money.
Be conservative with estimates, especially with home and vehicle values. Inflating the value of large assets may look good on paper, but may not paint an accurate picture of your net worth. Consider using a budgeting app that tracks your net worth for you automatically.
Keep liquid savings in high-yield accounts, which can help them grow faster if you're earning a competitive annual percentage yield. Make debt repayment a priority and consider refinancing or consolidating debts at a lower interest rate to help speed up your debt payoff.
Review your budget to look for areas where you can reduce expenses and allocate more money to either savings or debt repayment. If you have additional money to save, consider maxing out your emergency fund, then maxing out your annual contributions to an individual retirement account.
Time wealth changes your spending habits
When you view wealth as time as opposed to money, it makes you a more disciplined consumer.
Let’s say you are considering a major purchase, like a new house. Ask yourself a few questions –
Does this purchase free up my time?
Does this purchase enhance the time I can spend with the people that are most important to me?
Does this purchase require a sacrifice of time to fund it? Am I comfortable with that?
Now, sometimes you just need a new house. You may be a growing family and you simply need more space. These questions are best used for the “nice to have” purchases, as opposed to the “must-have” purchases.
In addition, this mindset can help raise awareness of how you’re currently spending money. I know everyone hates the b-word… budget, but budgeting truly should be viewed as an opportunity, as opposed to a punishment.
Budgeting brings awareness to whether or not your money is being spent in a way that is aligned with your core values. What if you found areas to spend less money on, so you could spend more on things to free up your time? Something as simple as hiring someone to clean your house or cook meals could be a low-cost investment that hugely frees up your time.
Or another example, rather than saving a ton of money for your children’s education, what if you invested in travel experiences with your family? This may not be the best decision financially, but it would allow you to create long-lasting memories for your family and teach your kids about different cultures. This is why parents shouldn’t automatically assume saving for college is the best thing to do.
The overall message is that viewing wealth as time acts as a filter for your financial decisions and helps protect against buying things that truly aren’t aligned with your core values.
Time wealth changes your career decisions
Time wealth not only acts as a filter for your spending, but also for your career.
Let’s say you have children and you are offered a much higher paying job that would also require a more intense time commitment. When you view wealth as money, as opposed to time, you will very likely take the job because it will pay more and increase your net worth.
However, when you view wealth as time, it forces you to take a much deeper look at the time you are giving up. The most consistent value that I have heard from parents is the ability to be present and involved with their children’s lives. This time filter may save you from giving up precious time that can’t be replaced by more money.
What if you want to change careers to something you love, but it pays less? This can be a very difficult transition when we have the mindset of money as the measure of success. Taking a job you love increases your time wealth because you are now spending more of your time in a way that is aligned with your core values.
Time wealth changes how much money you need
People focusing on time wealth will naturally spend less than those focusing on money wealth. You will be a minimalist at heart and a very disciplined spender to make sure your money is being used in a way that is aligned with your core values.
In addition, “retirement” won’t ever be a goal for you. If you are maximizing your time wealth, why would you ever want to stop? This will result in you generating income longer, which decreases the amount of money that you need to have saved up to support your living expenses. This is why “traditional” financial decisions change when you never retire.
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