What does Net Worth mean? Calculations, Importance, Advantages
Net worth is a concept that should be known by all individuals and companies. It helps for the financial growth and makes you stable financially. tradingcritique.com explains the concept of Net worth and clearly explains how to calculate net worth in this article. You can also learn the importance of net worth for various entities along with its pros and cons.
Meaning of Net worth
Net worth is the actual value of the assets you own in the present market price subtracting your liabilities or obligations. It helps in determining your financial health and financial stability.
Net worth can be calculated for individuals, companies, governments, institutions, organizations, countries, etc. Any entity that likes to find out their financial status and the net value of their holdings can calculate net worth for their economic growth and development.
Net worth also plays the main role in the fundamental analysis of stock trading and helps the traders to get an idea of the company in which they like to invest in and buy IPOs.
The formula for Net Worth
Net worth = Total Value of Assets you own – Total Value of Payable Liabilities
The answer for this net worth calculation can be both positive and negative. Let us see the significance of positive and negative net worth in the upcoming sections.
If the total value of your assets is £1,000,000 and the total liabilities that should be paid back is £500,000, then your net worth is £500,000. This means you have a positive net worth.
If the total value of your assets is £1,000,000 and the total value of your liabilities is £2,000,000, then your net worth will be – £1,000,000. Then it is negative net worth.
Calculation of net worth
To calculate net worth, you need to clearly understand what are assets and liabilities and how to differentiate between them.
Table 1: Difference between assets and liabilities with examples
| Assets | Liabilities |
|---|---|
| Any valuable sources you own are called assets. | Liabilities are things you owe. |
| Assets are anything that has value. | Anything you pay for becomes your liabilities. |
| You should be able to sell the assets in the market and get some price for them. | It can be said as the number of debts you have that are repayable. |
| Any sellable item you own comes under the asset column. | When cash goes out of your hand for any expenses it comes under the liability column. |
| Impacts your net worth positively. | Impacts your net worth negatively. |
Some examples of assets are,
| Some examples of assets are,
|
Steps to calculate your net worth
- List down all the assets you own.
- All things you own may have some value. Select the assets with a standard value that should be calculated in your asset column. For example, you can add up assets whose value are more than £1000.
- Add up and find the sum value of your assets.
- Next, take the list of liabilities you need to repay.
- Even the monthly bills can be a liability for you. Take the total of the expenses you do for your essentials and add up to your liability.
- Your loans, mortgages should be an important part of your liabilities.
- Add the total and get the value of your liabilities that should be paid back.
- Finally, subtract the liabilities value from the total asset value you got.
- You will obtain your net worth value.
- You can either get a positive net worth value or a negative net worth value.
Example for calculating the Net worth
Table 2: Net Worth calculation for a company
| Net worth calculation | |
|---|---|
| Value of assets | |
| Assets | Value |
| Current accounts | £34,000 |
| Savings accounts | £150,000 |
| Term Deposits | £4,300,000 |
| Other Cash | £96,000 |
| Accounts receivable | £850,000 |
| Shares/Mutual Funds | £75,000 |
| Other investments | £25,000 |
| Real estate | £98,500,000 |
| Vehicles | £60,000 |
| Total value of Assets | £104,090,000 |
| Value of liabilities | |
| Liabilities | Value |
| Loans | £100,000 |
| Mortgages | £540,000 |
| Accounts payable | £45,000 |
| Taxes to be paid | £34,000 |
| Total value of liabilities | £719,000 |
| Net worth = £104,090,000 – £719,000 = £103,371,000 | |
How to use Net worth to increase your financial status
When you calculate the net worth, you determine your financial status and financial strength. From your net worth value, many things can be determined such as your future plans, retirement goals, the time frame within which your debt has to be repaid, etc.
You can plan and prioritize many things from the Net worth value. The net worth you obtain can be either positive or negative. Both have their own significances which are explained in the below sections.
Positive Net worth
When the net worth you calculate gives a positive value, it is called positive net worth. It shows you a sign that you are financially strong. Positive net worth gives you hope that in any unavoidable situations you can pay back your liabilities by selling your assets. You will never become bankrupt.
When the positive value you obtain is equal to the total asset value it means that you have no liabilities. That is a very good sign of your financial strength. You can try to increase your assets.
When your positive value is less than your total asset value, then you should focus on reducing your liabilities and making your net worth equal to your asset value.
These kinds of persons whose net worth is positive or equal to the total asset value are called High net worth individuals.
If the positive net worth value is too less compared to your total asset value, then it is a caution sign. You should work to decrease your liabilities or else your net worth value can easily turn negative.
Negative Net worth
When the net worth you calculate gives a negative value, it is called negative net worth. It shows you a sign that you are financially weak. Negative net worth clearly notifies you that you cannot pay back your liabilities selling your assets. You can easily become bankrupt with a negative Net worth.
When the negative value you obtain is little, you can manage to bring back your negative net worth to positive. You can manage to pay back your liabilities easily with a proper financial plan. But if you are lethargic and do not take any steps your negative net worth value will increase. You may end up in Bankruptcy.
When the negative value you obtain has more value difference to bring up to positive, then you are in a very risky position where you can easily become insolvent. You should take rigorous steps to pay back your liabilities or else you will financially fail and may face many legal issues too. You may need expert advice to come out of your financial crisis.
tradingcritique.com provides you with free financial expert advice. Give us your details here and we will contact you back.
Table 3: Significance of positive and negative net worth Table:
| Type of net worth | Net worth in comparison with Asset value | Significance | Financial status | Comments |
|---|---|---|---|---|
Positive Net worth | Equal to the asset value | Very good | Strongest | Keep increasing your assets |
Little less than the asset value | Good | Strong | Try to make net worth equal to your asset value | |
Very much less than your asset value | Not good | Weak | On the verge of getting a negative Net worth, work hard | |
Negative Net worth | Little difference to make it positive | Not bad | Very Weak | Try to make your negative net worth to positive |
Much difference to make it positive | Very bad | Weakest and Instable | On the verge of Bankruptcy, need Expert status |
Applications to automatically calculate your net worth
Now many applications and websites are available which calculates your net worth automatically. This helps you a lot in managing your assets and liabilities. Some examples are YNAB, Personal capital, Mint, PocketSmith, etc.
When you search in Google as Net Worth Calculator, you can get free online Net worth calculators. There are also applications available to build your net worth.
Importance of net worth
Net worth helps you a lot in many ways when it comes to managing your finances. The main importance of calculating Net worth is to keep yourself financially healthy, strong and stable. Net worth works for different entities like individuals, companies, organizations, governments, and countries. Net worth also plays an important role in trading. Let us see its importance one by one.
For individuals
Net worth plays an important role for all individuals who are earning or starting to earn. Calculating the net worth of an individual helps in asset building.
An earning person can manage the finances properly to buy more assets. Increasing the asset value helps an individual to feel financially safe and secure. Planning for retirement, health expenses are easy when an individual has a good net worth.
Take college student who studies through an education loan. When he completes his education and tries to get employed, the net worth will be negative, as he has a liability to pay back his student loan. He should be responsible to pay back his education loan and make his net worth positive.
For companies
Calculating the net worth for companies can positively impact the economic growth of the company. The net worth of a company is given in a document called the Financial Statement which is released annually.
Loans and mortgages can be a part of a company. But it should be taken care that it does not decrease the net worth of the company. If net worth is taken lightly by the companies, then it may make the company insolvent.
For organizations
For governments
The government also works similar to the companies, corporates and organizations. Having proper financial procedures is important. Calculating the net worth of the government can make it financially stable and decrease government debts. This will automatically impact the livelihood of the citizens.
For countries
The net worth of a country is a total calculation of the assets and liabilities of its citizens, companies, corporations, organizations, and the government. The richest countries in the world are ranked by calculating the net worth of the countries.
A country that has a positive net worth is highly stable economically. Developed countries are the ones that have a positive net worth. Developing and Under-developed countries mostly have negative net worth due to higher amounts of debts.
For trading
Net worth is an important part of fundamental analysis in trading. Fundamental analysis is the basic analysis that should be done for any kind of trading. Net worth plays a key part in the stock trading analysis.
Advantages and Disadvantages of Net Worth
From the above sections you read, you can easily understand the advantages of Net worth.
- Gives a map of your Financial stability.
- Helps you to financially grow.
- Net worth can work as a motivation to increase your asset value.
- Gives you an alarm when your liabilities increase.
- Helps you to practically calculate the affordability of your loans and mortgages.
- Positive net worth acts as motivation, whereas the negative net worth acts as a precautionary sign.
There is no prominent disadvantage about net worth. Do not panic and take it as stress when your net worth turns negative. Take it as a sign of caution, think practically and change your net worth to positive. Taking this emotionally can work against you.
You can take advice from financial experts to change your negative net worth to a positive net worth. You can get financial support from our TradingCritique’s Financial Experts by providing your contact details here.
In a Nutshell – Net Worth
- Net worth is the actual value of the assets you own.
- To get the net worth value, Subtract the total liabilities value you need to pay back from your total asset values.
- Follow proper procedures to find out the net worth or else you end up calculating a wrong net worth value.
- Net worth can be both a positive and a negative value.
- Many applications and free online calculators are available to calculate net worth.
- Net worth can be calculated for any entities such as individuals, couples, families, companies, corporates, organizations, governments, and countries.
- Advantages overweigh when it comes to calculating your net worth.
tradingcritique.com has explained to you very clearly about net worth. What changes have happened to you because of calculating net worth? Give your answers and if you like to add up any more information on the Net worth you can add them in the comments.
Ask your doubts on net worth in the comments sections. You can get free financial advice from the Trading Critique’s financial experts by providing your details here.
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