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What Is Net Worth?


DEFINITION
Net worth is the value of everything you possess, including your financial and non-financial assets, less any obligations you owe.

Key Takeaways
Net worth is the total value of assets possessed less all liabilities.

Net worth may be estimated for people, families, corporations, industries, and governmental bodies such as cities or nations.

Net worth gives an overview of one’s financial health and may assist assess whether one is making progress toward financial objectives over time.

The net value of a firm is also known as shareholder equity.

Definition and Example of Net Worth

Net worth is the amount of one’s assets minus total liabilities. When determining net worth, it may be a positive or negative figure. For example, if someone owes more than the entire value of their possessions, they have a negative net worth. Calculating net worth is one approach to assess financial wellness.

Assets are everything that a person or an organization has that has worth. It may include:
  • currency or currency equivalents such as life insurance plans
  • Investments such as stocks or bonds
  • Real estate, motor cars, jewels, collectibles, and other physical assets
  • Equipment or inventory for a company
Liabilities are financial responsibilities or debt. This may include:
  • Mortgage
  • Auto loan or student loan
  • Credit card balance
  • Accounts payable (for a company)
If a couple owns $100,000 in checking, savings, and retirement accounts, lives in a house worth $300,000, and drives two automobiles worth $15,000 each, their assets total $430,000. (Let’s suppose they don’t possess costly jewelry, furniture, or other illiquid assets, nor do they have life insurance plans.)

If they owe $100,000 on their house loan, $10,000 in vehicle loans, and have credit card debt of $5,000, their liabilities total $115,000. Thus, their net worth is computed by deducting $115,000 in liabilities from their $430,000 in total assets, or $315,000.

How Does Net Worth Work?

Knowing your net worth is crucial since it may be a helpful indication of your financial health. When examined year over year, net worth may demonstrate whether a person or an organization is making progress toward increasing their financial well-being.

Once you have estimated your net worth, a strategy may be established to consistently enhance it. This may be done by saving more money, paying off debt, expanding your assets, or observing an improvement in an asset’s worth, such as a house.
Note
The value of your property is a significant component in calculating net worth. Get an estimate of its current worth by putting your address into an online home value calculator, contacting a local real estate agent for a comparative market study, or employing a professional appraiser.
Net worth is not estimated to compare financial health against others, but rather, to assist you assess your progress in increasing your net worth from year to year. In retirement, your retirement spending plan may allow for your net worth to fall year over year as long as your savings will endure for your whole life expectancy.

Initially determining your net worth will entail collecting a substantial quantity of information, but it should be simpler in later years provided you maintain all that information in a safe location.

Types of Net Worth

One may determine the net worth of a home, company, industry, or a political body such as a city, state, or nation. The net value of a firm is frequently referred to as “shareholder equity.”3 It is the entire amount of assets that shareholders will possess if a business’s debts and obligations are paid off.

Companies and governmental bodies frequently evaluate their net worth for many of the same reasons a household does: to gauge financial health, to identify when steps should be taken to enhance financial health, and to assist monitor progress in improving financial health. A firm that is constantly profitable will likely raise its net worth gradually, which is generally followed by a rise in its stock price.

What Net Worth Means for Households

Net worth offers people a method to analyze their financial health and define future objectives. It is desirable to grow net worth as you age. A negative net worth is not a cause to worry for young individuals, who may be facing student bills, a vehicle loan, and everyday living costs while earning a beginning wage in their chosen industry.

There is no “right” net worth to aspire for. National averages are provided that might give something to assess your financial condition against. The median net worth of all U.S. households was $121,700 in 2019, according to the Federal Reserve Board’s Survey of Consumer Finances.

Monitoring net worth may assist with financial choices and in analyzing development. Lowering or eliminating debt is a smart method to boost one’s net worth, but it’s vital to remember that a great personal finance plan generally combines investing and paying off debt concurrently.

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