You most likely saw this jargon from Forbes, TV, News or even in your social media accounts. This term always rings whenever we are encountering topics about rich people or success. But what’s in it that makes it so compelling that this number can already determine if someone is rich or not (Yeah, I’m telling you it is not the phones they are using or the cars they’re driving – those stuff can be faked).
The same reason why we have to know someone’s net worth rather than looking at what car the person is driving as our determinant for if someone is “rich”. We often hear some news about superstar or athletes earning millions every year then suddenly filed for bankruptcy.
WHAT IS NET WORTH?
According to Investopedia;
Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company’s health, providing a useful snapshot of its current financial position.
This is basically your total asset value after deducting all your indebtedness (yes, including your loans, mortgage, credit cards and even your payables to your relatives).
This will help you gauge whether you are at a good financial position or in the verge of bankruptcy.
HOW TO COMPUTE YOUR NET WORTH?
The simple formula that you need to know:
ASSET – LIABILITIES = NET WORTH
That’s as easy as that! Now, let’s break down it main components and identify what are these:
- Cash on hand – your money in your piggy bank, wallet, purse,
- Cash in bank – your savings account, checking account, foreign currency account, time deposits
- Investments – your stocks, mutual funds, retirement account (yes, this is definitely one of your investments)
- Properties – the current value of your land, car, house, farm
- Receivables – these are the amounts that are owed to you – e.g., owed money by your friend
- Mortgages and loans
- Credit card bills
- Consumer debts
- Payables – these are the moneys your owed to other people
We have simplified the above category for you to have a glimpse of what should be included in your net worth but this can go as complex as it can depending on the type of assets or liabilities your have. For now, the above is a great start for you.
NET WORTH CALCULATORS
You can check these websites if you wanted to compute how much is your net worth:
These net worth calculators may vary in terms of how specific they have classified each type of assets and liabilities but they are all pretty useful in computing your net worth.
WHAT DOES YOUR NET WORTH MEANS?
(+) Positive Net worth
This means that you have accumulated more assets than your debts. This shows that you are putting your money to the right assets and accumulating wealth.
(-) Negative Net worth
This means that you owed more than what you have. Your debts and obligation’s value has surpassed the assets that you have.
We are often blinded by the assets or stuff that we have, only to find out that we have so much debts and obligations that needs to be settled. Having a negative Net worth may look bad but don’t worry you already did the initial step to be accountable in your personal finances – that’s to compute your Net worth.
WHAT’S NEXT FROM THIS?
Knowing and understanding your Net worth is the initial step towards financial literacy. But the most important thing is, what actions you will do in response to your current Net worth. These actions will determine if you will stay with that negative (-) Net worth (assuming you got a negative one) after 10 years or will be living the life that you ever dreamed of. Today is the day to take responsibility of your future.
2 replies on “What is ‘Net worth’ and how to compute yours?”
[…] 3. Regularly computing your net worth – Your net worth says a lot about your financial status, this can be used as a gauge whether you are going or moving away towards your financial goals. Being aware of your net worth gives a sense of which spending are considered as beneficial or harmful to your net worth. Check it here on how to compute your net worth. […]
[…] you tracked you net worth each month, you tend to save more and invest […]