What is Net worth? How to Calculate Your Net Worth?

An individual or institution’s net worth is the sum of the value of all its financial and non-financial assets minus the value of all its outstanding liabilities.

Due to the fact that financial assets minus outstanding liabilities equal net financial assets, net worth can also be expressed as non-financial assets plus net financial assets. It can be applied to companies, individuals, governments, or sectors of the economy, such as financial corporations or entire countries.

The net worth of a person represents his or her financial position. This can be used for creating budgets, influencing wise spending, motivating one to pay off debt, and saving and investing. Looking at one’s net worth is also important when planning for retirement.

Definitions of Net Worth

Companies

Equity is another name for net worth in business. Generally, it is based on the carrying value of all assets and liabilities, the value expressed on the financial statements. When items on the balance sheet do not reflect their actual (market) value, the net worth will also be inaccurate. If the accumulated losses exceed the shareholder’s equity on the balance sheet, the net worth becomes negative.

Using this formulation, net worth doesn’t express a firm’s market value; a firm may be worth more (or less) if sold as a going concern.

A major aspect of business loans is net worth versus debt. In order to increase their net worth, business owners must “trade on equity.”

Individuals

Net worth or wealth refers to an individual’s net economic position. It is equal to the value of the individual’s assets minus the value of their liabilities. Assets that are factored into a person’s net worth include retirement accounts, investments, a home, and a vehicle. 

Secured debt (such as a home mortgage) and unsecured debt (such as consumer debt or personal loans) both constitute liabilities. Intangible assets such as educational degrees are usually not considered in determining net worth, even though they positively contribute to one’s overall financial standing.

Net worth can be used to determine the value of an estate when a deceased individual is in probate.

In the financial services sector, individuals with high net worth and ultra-high net worth are referred to as high-net-worth individuals and ultra-high-net-worth individuals, respectively.

Knowing a person’s net worth can be a useful tool in understanding their current financial standing and as a reference point for determining future financial success.

Governments

For governments, it is also possible to create balance sheets that include all assets and liabilities. A government’s net worth can be used as an alternative measure of its financial strength to government debt. In order to provide a transparent picture of government operational costs, most governments use an accrual-based accounting system. 

Cash accounting may be used by other governments to better predict future fiscal events. However, the accrual-based approach is more effective when it comes to the overall transparency of a government’s spending. Several large governmental organizations rely on consistent and effective accounting to determine their total net worth.

Countries

A country’s net worth is calculated as the sum of the net worth of all its companies and individuals, plus that of its government. For the United States, this measure is referred to as the financial position, and it totaled $123.8 trillion in 2014.

Adjust For Inflation

If the economy in which the accounting entity carries out its activities is characterized by inflation, the various concepts that make up net assets must be adjusted accordingly. The implementation of these adjustments is governed by IAS No. 29 issued by the IASB. 

According to this standard, the accounting adjustment must be made when the economy is in a context of hyperinflation, which is official when all the following conditions are met:

  • The population prefers to hold its wealth in the form of non-monetary assets or in a relatively stable foreign currency. Moreover, the amounts received in local currency are invested immediately to avoid the loss of their purchasing power.
  • The population does not pay attention to the amounts of money expressed in local currency but sees them in a relatively stable foreign currency, and it is common for prices to be set in this other currency.
  • Sales and purchases on credit are made at prices that compensate for the loss of purchasing power expected during the deferral period, even if that period is short.
  • Interest rates, wages, and prices are linked to the development of a price index
  • The cumulative inflation rate in three years exceeds 100%.

The accounts that make up the assets must be adjusted taking into account the inflation indices, which leads to an increase in the amount that is offset by inflation. 

This applies to all wealth accounts except the “Social Capital” account, whose amount cannot be increased, so the “Capital Adjustment” account is used instead, which is considered a non-capitalized contribution.

How to Calculate Your Tangible Net Worth?

Financial assets and liabilities are the components of net worth. Homes, vehicles, various types of bank accounts, money market accounts, and stocks and bonds contribute to net worth. Liabilities include loans, mortgages, and accounts payable (AP) that deplete resources.

Net worth differs from tangible net worth in that the former includes all assets and the latter excludes those that cannot be touched. 

An asset is anything you own and can convert into money. By this definition, assets include cash, investments, real estate (land and permanent structures like houses that are attached to the land), and personal property (everything else you own, like cars, boats, furniture, and jewellery). 

These are your tangible assets: all the things you can own. Although investments are considered financial assets rather than tangible assets, they are often included in the tangible asset category for purposes such as this because they can be converted to cash.

Unlike tangible assets, intangible assets can’t be held. Since you can not see or touch them, goodwill, copyrights, patents, trademarks, and intellectual property are considered intangible assets. 

Your small business may appreciate in value because of these intangible assets if you want to sell it. If determining tangible net worth is part of the loan process, the bank may only consider tangible assets because they are easier to liquidate.

You can calculate your tangible net worth using the following formula:

Tangible Net Worth =Total Assets−Liabilities−Intangible Assets

For your tangible net worth to be calculated, you must first determine your total assets, liabilities, and intangible assets:

  • Total Assets: Cash and cash equivalents, Investments, Real property, Personal property
  • Total Liabilities: Secured liabilities—auto, mortgage, home equity loans, etc. Unsecured liabilities—credit cards, medical, student, personal loans, etc. Deferred tax liabilities on retirement accounts, etc.
  • Value of Intangible Assets: Goodwill, Patents, Trademarks, Intellectual property, Other IP      

Calculating your net worth involves several steps. Decide whether you want to calculate your net worth individually (you) or jointly (you and your spouse or partner). Also, keep all your bank statements (e.g., bank statements and credit card statements) in one place.

Calculating your net worth will probably take the longest the first time. However, once you figure out the methodology and how to value your assets, the process will likely take less time. Here’s a step-by-step guide.

Calculating Assets

This is the first step in determining the value of your assets. When reviewing your assets, start with the most liquid, your cash and cash equivalents, including

  • Certificates of deposit
  • Checking and savings accounts
  • Money market accounts
  • Treasury bills
  • Physical cash

Next, determine the current market value of investments. These include

  • Annuities
  • Bonds
  • Mutual funds
  • Pensions
  • Life insurance cash value
  • Retirement plans—IRA, 401(k), 403(b)
  • Stocks
  • Other investments

Real and personal property—tangible assets are next on the list. Any property that’s permanently attached to the land, such as a house, falls under real estate. Everything else is personal property. Included are:

  • Collectibles—antiques, art, coins, etc.
  • Household furnishings
  • Home technology
  • Rental properties
  • Vacation or second home
  • Jewelry
  • Primary residence
  • Vehicles: cars, boats, motorcycles

Add them all up – the cash/cash equivalents, investments, and real or personal property. The total represents your assets.

Calculating Liabilities

Liabilities are relatively easy to quantify, since they represent all of your outstanding debts, and you probably receive statements or reminders regarding them on a regular basis. These statements reflect actual numbers, not estimates, and show exactly how much you owe.

To begin, determine how much you owe in secured debts, including

Continue by calculating the amount of unsecured debt you owe, including

Add secured and unsecured debt. Your total liability will be the sum of secured and unsecured debt.

A Net Worth Spreadsheet

Once you know the value of all your assets and the size of all your liabilities, you can use the formula (Tangible Net Worth = Total Assets – Total Liabilities – Intangible Assets) to calculate your tangible net worth.

The net worth spreadsheet shows your total income, expenses, and savings. It also calculates your margin (income minus expenses) and your monthly savings rate (savings divided by income). It’s a great tool to get an overview of where your money is going and where you should focus to improve it in the next month.

You can directly enter the total for each category (or use a calculator to figure it out) into the spreadsheet.

Here’s a step-by-step on how to set the spreadsheet up:

  • Choose the “Net Worth” sheet. Fill in the empty cells left of “Your accounts here” with the names of your accounts or assets/liabilities. You can add more than one account in a row by right-clicking one of the columns and selecting “Insert 1 left” (or right).
  • Include your first few data points. Editing the graph is only possible after you have made an entry.
  • Select the “Graph” sheet and click on the “Edit chart” button in the top row. Navigate to “Vertical axis” by selecting “Customize”.

The maximum number should correspond to your net worth goal. It may be necessary to navigate to “Gridlines” and select a gridline number that doesn’t make your intervals look wonky depending on the number. If you don’t want a y-axis, make the text of the vertical axis white.

Keeping an eye on your net worth can help you determine if your expenses do not match your income or if you have accumulated too much debt. Negative net worth means you have more debt than assets. It’s a sign that you are spending more than you are taking in, or that you are getting into debt faster than you are making money.

Net Worth Calculator

If you want to calculate net worth, you can input your assets and liabilities in the net worth calculator below to find your net worth in a minute.

Tips for Calculating Net Worth

Keeping orderly records is extremely beneficial and will help you speed up the calculation of your net worth. Keeping all of your important financial statements in a filing cabinet (or on your computer) will help you find them quickly. Now is the perfect time to organize your records.

You can also keep all your net worth statements in a “net worth” file (in your filing cabinet or on your computer) where you can compare them. If you do not have to regularly search for every piece of information you need to calculate your net worth, it will be easier (and more fun).

Final Words

Intangible assets, including copyrights, goodwill, intellectual property, patents, and trademarks, are deducted from your tangible net worth. The standard net worth calculation (assets minus liabilities) is sufficient for most individuals, but those with intangible assets may need to calculate their tangible net worth to qualify for an individual or small business loan.

You should calculate your net worth yourself at least once, even if you choose to use one of the many online calculators or apps available. That way, you will get the most out of the calculations.

Instead of using a pencil, paper, and a calculator, a spreadsheet program like Microsoft Excel or Google Sheets can do the calculations for you and reduce the chance of miscalculations.

As with any net worth calculation, it’s important to get the values of your assets right. Individuals and businesses tend to seek the advice of qualified professionals when valuing intangible assets.

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