When you search for celebrities or big companies, one of the very common topics or articles you see is the net worth of these individuals or concerns. Some in millions while some in billions. But, then you must wonder, what exactly is net worth and how is it calculated? In this article, we will explain net worth meaning and net worth formula.
Net Worth Meaning: How is it Calculated?
One thing a lot of people are curious about is the net worth of their favorite celebrities or people they follow. Many people also try to figure out net worth of other people. But what is meant by net worth? Let us find out.
What is Net Worth?
Net worth is the sum of the value of all of the assets, including both financial and non-financial ones, less any liabilities one may have. Net worth can be either positive or negative. A person has a negative net worth, for instance, if their debts exceed their assets combined. One method of evaluating financial health is to compute net worth. When compared year to year, net worth can demonstrate if a person or business is improving their financial situation.
Once you have determined the net worth, they may create a strategy to gradually raise it. This can be accomplished by increasing savings, reducing debt, increasing investments, or observing a growth in the value of an item, such as a home. Net worth is determined to assist in tracking the progress toward boosting wealth throughout the year rather than to compare financial health to that of others. Read more to get a deep understanding of net worth meaning.
Types of Net Worth
After learning liquid net worth meaning, let us go over its types. In general, there are 4 types of net worth that one should know of before understanding net worth formula.
- Net Worth: The overall word being utilized is net worth. It comprises all types of assets, liquid or not, including Employee Provident Funds (EPF), real estate (apart from residential houses), cash, stocks, mutual funds (including ELSS), and more. It can be determined by deducting the amount of the liability from the total value of the assets.
- Liquid Net Worth: This is the net worth type that is mentioned the most. Free Net Worth is another name for liquid net worth. These assets exclusively include liquid assets with no lock-in periods, such as cash, stocks, mutual funds (other than ELSS), fixed-term investments (FDs), bank accounts, etc. Liabilities are subtracted from liquid assets to determine liquid net worth.
- Full Net Worth: All assets that are protected by net worth as well as depreciating assets like furniture and cars are included in total net worth. Jewelry, home of one’s own, etc. are also included. Financial planning does not often employ this Net Worth type.
- Maybe Net Worth: This sort of net worth includes any items that could contribute to net worth in the future. Since there is just a chance that these assets may materialize, they shouldn’t be taken into account while making financial plans. This includes the anticipation of debt payback provided to a friend or family member, an inheritance, property held in stock, a legal dispute, etc.
Calculation and Formula of Tangible Net Worth
The net worth of several of the richest celebrities in the world can be easily ascertained. A person’s net worth may be determined by deducting all of their debts and obligations from the sum of their assets. The tangible net worth formula is basically the total value of everything you own after subtracting any debts you may have.
Net Worth = Total Assets – Total Liabilities.
Now that you know what is net worth meaning and that assets and liabilities are the two variables that will help you calculate the net worth of any individual, let’s find out what all are included under these two categories:
An asset is something valuable. An asset is anything that will eventually be worth money. It is anything that you can use, cash out, or sell.
- Cash: Cash includes all forms of money, including paper money, electronic money, certificates of deposit, and checking and savings accounts.
- Investments: These include mutual funds, equities, bonds, pension funds, and retirement funds.
- Property: Anything that involves real estate, homes, vehicles, and boats, among other things.
- Miscellaneous: Jewelry, antiques, collectibles, works of art, furniture, etc.
In essence, liabilities are debts that one has to others as per the tangible net worth calculation.
- Creditor debt
- Mortgage loan
- Any type of loan
- Business loans
- Unpaid invoices
Also Read: Tax on Dividend Income: What You Should Know
What is Negative Net Worth?
If the total debt exceeds total assets, negative net worth is an outcome as per liquid net worth meaning. For instance, a person’s net worth will be negative if the total of their credit card, utility, outstanding mortgage, vehicle loan, and student loan expenses exceeds the whole amount of their cash and investments.
Negative net worth is an indication that a person or family has to concentrate their efforts on paying down debt. A strict budget, the application of debt reduction techniques like the debt snowball or debt avalanche, and maybe negotiating certain debts with creditors can occasionally enable someone to escape a negative net worth situation and begin accumulating resources. This article focuses on net worth and tangible net worth calculation.
Net worth probably doesn’t matter all that much daily. However, over time, understanding net worth meaning may serve as a helpful indicator of one’s financial development. If the liabilities and financial obligations exceed the assets and the trend is continuously downward rather than upward, then the net worth will go negative and therefore one might need financial assistance and planning. Similarly to this, one might need to reconsider their spending habits if they wish to increase their assets but discover that net worth isn’t increasing over time. Overall, a net worth of an individual is a good indicator of their financial health, investments, assets, and overall wealth.