Calculating Your Net Worth A Beginner's Tutorial

Net Worth Meaning- How to Calculate & Raise Your Net Worth

We all earn and spend money in many forms, but ultimately, what we are left with is more important. In simple terms, we define it as our savings.  But what really is it? Well, it is what we call our net worth.

Net worth is a figure a person or corporation is left after deducting its liabilities from assets. The net worth is an important figure that gauges a company's health and provides insights to find where it stands financially.

But Why Is Measuring or Determining One's Net Worth Essential?

We know that hedge funds and similar institutions have established specific criteria for their investment strategies to invest in their financial products. These criteria are often determined by net worth, which ranks people according to it. People and business organizations with higher networks are only eligible to invest in hedge funds or complex investment strategies. Therefore, determining the net worth becomes very important.

Key Points

  • If you own more than what you owe, then you have a positive net worth. (Assets > Liabilities)
  • Alternatively, if what you owe is more than what you own, it is a negative net worth. (Assests< Liabilities )
  • The matrix of net worth is applied to an individual, a group, an organization, a government, or even an entire city or country.
  • Tracking a net worth is a helpful indicator to determine financial stability.
  • Net worth helps you understand where your money has gone in the past versus where you want it to go in the future.

How Do You Determine Your Net Worth? 

Network calculation is quite simple, but the most essential part is to assess what falls under assets and liabilities.

The steps below guide you on how to determine your network. 

  1. Calculating assets

Everything that has a tangible value is an asset. It includes a house, car, an art piece, money in your bank account, insurance policies, or other investments.

Everyday things like clothes and furniture should not be counted as assets as you can't sell them during your financial troubles. It concludes that assets are valuable things you can sell during hard times.

  1. Calculating Liabilities

Liabilities are the money you owe to others. It includes loans, mortgages, rent, and bills. For business, it has current liabilities, long-term liabilities, contingent liabilities, interest payables, etc.

  1. Calculate Net worth

Make a list of your total assets and liabilities and subtract liabilities from the assets. What you have with you is your net worth. To assess your financial health, you can calculate your network more often in a year.

Net Worth Formual
Example of net worth 

  1. Positive net worth

You add up to $200,000 after adding up all the assets.

$120,000(Home Equity) + $30,000(Savings) + $40,000(Investments) + $10,000(Car)= $200,000

You add up to $100,000 after adding up all the liabilities.

$60,000(Moratage Loan) + $20,000(Car Loan) + $15,000 (Credit Card Debt) + $5,000(Others)= $100,000

Total Asset - Total Liabilities =Net worth 

$200,000-$100,000 = $100,000

A positive net worth means your financials are in good health.

  1. Negative Net worth

You add up to $100,000 after adding up all the assets.

$30,000(Savings) + $25,000(Investments) + $15,000(Car) + $10,000 (Electronics) + $20,000(Jewelry)= $100,000.

You add up to $200,000 after adding up all the liabilities.

$120,000(Mortgage Loan) + $50,000(Students Loan) + $20,000(Personal Laon) + $10,000(Credit Card Deb)= $200,000

Total Asset - Total Liabilities =Net worth 

$100,000-$200,000 = $-100,000

A negative net worth means your financials are in bad health.

Do You Include the House in Your Net Worth? 

Your home is the most valuable position you have. However, it is also true that it is the source of significant debt. The more ownership you have in your house, the more net worth you have. To calculate the net worth, you need to subtract your liabilities, including your mortgage.

For example, if you have a house valued at $ 300,000 and still owe $ 200,000 on your mortgage, your home adds $100,000 to your net worth. It implies that the more mortgage you pay, the more equity is added to your net worth.

What Is the Average Net Worth of Americans?

The Federal Reserve Board releases a survey of consumer finance every three years. This is used to determine the average net worth of Americans. According to the most recent report published in October 2023, the average network of US households is about $1.06 million.  It is important to note that wealthier households highly influenced this figure, which made it relatively high.

To make the figure more realistic, the median or middle value is used to calculate the overall median network of the US households, which concludes at $192,900. It is the most accurate representation of the net worth of everyday people.

average net worth by Age
Why is it important to calculate Net worth?

Net worth is substantial because it shows how much time you require to accomplish the goal of living a debt-free life. Net worth is a valuable metric to determine one's financial position regardless of class or income level. Simply, it shows your ability to handle finances and your choices. It helps you to set and fulfill your financial goals. It is also essential to understand that net worth is not a fixed number. It changes according to your financial situation. 

It doesn’t matter how much you earn; if your liabilities exceed your assets, your net worth will remain low. Even an individual with a lower salary may have a higher net worth if his liabilities are less and assets are more. It is not about how much you earn. It's about how you manage your finances. 

Though calculating net worth is to understand your financial position, it is more important to consider other factors that you see as more valuable, like flexible jobs, time, freedom, health, and happiness.

How to Raise Net Worth?

There are multiple ways to raise your Net worth.

  1. Pay your debts: Liabilities are important for calculating net worth. More liabilities imply lower net worth. To raise your net worth, try to pay off your debts as soon as possible. You can consider the snowball or avalanche method to do it faster.
  2. Increase your income: You can increase your income by asking for a raise at work or starting a part-time job. But keep in mind your income doesn't raise your net worth. You will need to increase your assets to be on the positive side. Read also... how to make passive income
  3. Increase your investments: Your investments are your biggest asset as they save you during hard times. So, it is important to have diversified investment options. 

Final Words

We often come across the net worth of celebrities, sports stars and business tycoons and get fascinated by their big numbers. The best thing about net worth is it is not limited to celebrities, sports stars, and business tycoons, as every individual can calculate their net worth. A net worth is simply a metric that determines the financial health of an individual. It is not similar to income as it is calculated after deducting all your liabilities and adding all your assets. If you have a negative net worth, work hard to be on its positive side, and if you are already there, then don’t forget to give a toast to yourself! 

Also Read:

  1. How to attain Financial Freedom

  2. How to deal with Financial worries

29 Dec, 2023

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