What is a Net Worth?<\/strong><\/h3>\nIt is a quantitative concept which measures the value of an entity. It is applicable ranging from an individual to companies, organizations, sectors and a country as a whole. To put it simply, it is the difference between assets and liabilities. A positive net worth means assets are greater than liabilities, whereas negative net worth mean liabilities are greater than assets.<\/p>\n
Formula:<\/strong><\/p>\nNet Worth = Assets \u2013 Liabilities<\/p>\n
A little more into Net Worth Concept:<\/strong><\/p>\nNet worth conveys the financial health of any entity. Asset is anything that is owned and has a monetary value to it while liabilities is a commitment that deplete resources. Assets can be liquid or which can turn into liquid ( example: bank check ). They are non-liquid when they take time to turn into cash (like for example Home). Whereas liability is an obligation that has to be repaid ( example: home loan, car loan etc.,)<\/p>\n
Any financial institution or 3rd party look at your assets and liabilities to understand the financial position. Positive net worth or increasing asset base indicates good financial health while negative net worth or increasing liabilities means a bad financial health condition.<\/p>\n
It is always a good habit for any entity to maintain a reduce liabilities and increase or maintain a balanced asset base.<\/p>\n
What does a Net Worth Mean to a person?<\/strong><\/h3>\nIn simple terms, it means the value that is left after subtracting liabilities from assets. Few Examples of liabilities include car loans, student loans, home loans, credit card bills, and other mortgages etc., whereas an individual’s assets are amount in the savings account, home, vehicle, bonds, stocks and other material that has value.<\/p>\n
In other words, whatever is left after paying off all the personal debt from asset base is net worth. It is important to understand that value of net worth varies as per the market value of assets and current debt costs.<\/p>\n
For example:<\/strong><\/p>\nConsider a case of Ramu Johnson. His assets include a house valued at $350000, shares worth $150000 and a car worth $35000. His liabilities include a mortgage balance of
\n$150000 and an outstanding car loan $15000 to be paid.<\/p>\n
Now Ramu Johnson’s Net Worth = ($350000+$150000+$35000) \u2013 ($150000+$15000)
\n= ($535000 ) \u2013 ($165000)
\n= $370000<\/p>\n
Assuming Ramu Johnson’s financial position after five years as follows \u2013
\nHouse value at $350000, Shares value at $180000, savings $ 40000 and car value $25000. While mortgage loan $120000, car loan $0 (paid off).<\/p>\n
The Net worth after 5 years would = ($350000+$180000+$ 40000 + $25000 ) \u2013 ($120000)
\n= $595000 – $120000
\n= $475000<\/p>\n
Here it is understood that, although the fact that the value of a house and car decrease, the net worth have increased to $475000. It is because a decline in house loan is less than the overall asset base and decrease in liabilities.<\/p>\n
Note that, an individual’s net worth can be negative if his asset base is less than liabilities.<\/p>\n