The term net worth is used often in the context of financial prowess (and bragging rights). For example, Jeff Bezos’ net worth is $177 billion and he is the richest person in the world.
But calculating net worth isn’t reserved for the ultra-rich. Regular investors and salaried professionals can calculate their net worth using a simple formula (Scroll down if you want to skip right to it!).
What Is The Net Worth Of A Person?
Net worth is calculated by subtracting the total liabilities from the total assets that a person owns. This will give you a snapshot of how much you’re financially worth.
Furthermore, knowing your net worth can help you understand if you’re on track to achieve your financial goals. It can help you analyze your spending habits.
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How To Calculate Net Worth?
You’ll need two things to calculate net worth: your assets and liabilities. Here’s how you can compile both and figure out your net worth.
1. Calculate Assets
Assets may include (but are not limited to):
- Investments: mutual funds, stocks, alternative assets, fixed deposits, gold, silver, commodities, antiques
- Property: real estate, land, rent receivable
- Vehicle: cars, two-wheelers, three-wheelers
- Cash: in-hand, bank savings account
Add each of these to calculate the sum total of your overall assets.
2. Calculate Liabilities
Liabilities basically mean the debt you owe that may include (but is not limited to):
- Credit balance: credit card, credit received from broking app or company
- Rent payable: home, vehicle, appliances, furniture
- Mortgage: home loan, property loan
- Personal loan: wedding, gold, silver, healthcare
- Borrowings: cash or cash equivalents
- Tax: Income tax, capital gains tax, property tax
- Overdraft: for sole traders and partnerships
Add each of these to calculate the sum total of your liabilities. You’re now ready to figure out your net worth.
3. Calculate Net Worth
Subtract your total liabilities from your total assets to know your net worth.
Total Assets - Total Liabilities = Net Worth
Remember:
- Net worth will be positive if your total assets are more than your total liabilities
- Net worth will be negative if your total liabilities are more than your total assets
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Calculating Net Worth With An Example
Mr Cube has ₹1,00,000 worth of investments; ₹10,00,000 worth of properties; ₹50,000 in the savings account. Mr Cube owes a credit card balance of ₹10,000; ₹70,000 in loans; ₹20,000 in tax.
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Mr Cube
|
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Assets
|
Liabilities
|
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₹1,00,000
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₹10,000
|
|
₹10,00,000
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₹70,000
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₹50,000
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₹20,000
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Total A: ₹11,50,000
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Total L: ₹1,00,000
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Mr Cube’s net worth:
₹11,50,000 - ₹1,00,000 = ₹10,50,000
Why Is Net Worth Important?
It’s difficult to track every rupee you earn or spend and that’s where knowing your net worth can be useful. It’ll give you a broad idea of your financial health, spending habits, and wealth creation goals.
You’re in good shape if your net worth is positive. It’s time to go back to the drawing board if your net worth is negative. Thus, tracking your net worth quarterly could help you plan for the future.
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FAQs
Q. What Is An Example Of Net Worth?
Ans. Assume you earn ₹2,00,000 per month and spend ₹1,20,000 a month. Your net worth at the end of the year would be: ₹24,00,000 - ₹14,40,000 = ₹9,60,000.
Q. How do you calculate your net worth?
Ans. To calculate your net worth, simply add your assets and subtract all your liabilities from them. You can use this formula to calculate net worth: Total Assets - Total Liabilities = Net Worth.
Q. Is net worth actual money?
Ans. Net worth indicates your actual financial value or the total value of your assets minus your liabilities. Thus, it may be a combination of actual money (cash or cash equivalents) and assets (investments, property, lending).
Q. How is net worth calculated?
Ans. Net worth is calculated by subtracting total liabilities from total assets. The formula is: Net Worth = Total Assets - Total Liabilities.
Conclusion
Net worth is a crucial financial metric that reflects an individual's or entity's financial standing by quantifying the difference between total assets and total liabilities. It provides valuable insights into financial health, allowing individuals to set goals, monitor progress, and make informed decisions about managing assets and debts. A positive net worth is generally considered a sign of financial stability, but it's essential to understand the composition of assets and liabilities to have a comprehensive view of one's financial situation. Regularly calculating and reviewing net worth can help individuals maintain control over their financial well-being and make strategic financial plans.
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