Have you heard people talking about net worth? The net worth is not only for the businesses or the high earning individuals. People from all classes need to know all about net worth and its importance. Let us help you understand all about net worth and its importance.
What is net worth?
You may know your annual income but your net worth is way different from your income. It is the simple addition of all assets including cash, accounts, investments, retirement accounts, property values, etc., and subtracting the liabilities including mortgages, student loans, debt, credit cards, etc. The process of buying, borrowing, and making investments with money amounts to the total properties value as the value of total cash goes up and down according to the same.
Net worth is popularly called shareholder’s equity or book value. People having significant net worth are called High-Net-Worth-Individuals (HNWI). You may have seen the net worth of popular celebrities and personalities. It is a clear indication of their financial stability. Let us find a simple formula that can be used by anyone to calculate respective net worth.
A simple formula to calculate net worth:
It is simple and easy to calculate net worth using a simple formula. All you need to know is the details of the total assets and liabilities. Assets stand for all things having monetary value while liabilities are the obligations that are the depleting resources like mortgages, accounts payable, loans, etc. The formula is:
Net Worth = Assets – Liabilities
Net worth is the parameter that lets an individual knows about the financial health of the person or organization. It is a quantitative concept that measures the entity’s value. It applies to countries, sectors, corporations, individuals, etc. Hence, it lets the people know about the current financial position of the person.
Net worth can be positive or negative based on the financial health of the individual or party. The positive net worth stands that the entity is having good financial health and assets are leading the liabilities. The negative net worth stands that the entity is having bad financial health and the liabilities are increasing over the accountable assets. Let us now go through the different types of net worth.
Different types of net worth:
- Net worth in personal finance- It is the value obtained by subtracting the liabilities from the assets for any individual. The assets for individuals include automobile’s market value, real property value, the value of securities like bonds or stocks, savings or checking accounts balances, etc. The liabilities for individuals include car loans, student loans, credit card balances, mortgages, etc. The net worth in personal finance is the value left after paying off all the personal debt and selling all the assets.
Based on the net worth in personal finance, the investment counselors and wealth managers work for the High-Net-Worth-Individuals or HNWI clients. Further, investors with at least a net worth of 1million USD excluding the primary residence either living alone or with the spouse are the “accredited investors” according to the Securities and Exchange Commission (SEC) guidelines. All such individuals are allowed to invest in unregistered securities offerings.
- Net worth in business- It is termed as shareholder’s equity or book value or balance sheet statement. The company’s equity value is the difference between the total assets value and the total liabilities. All the values on the company’s balance sheet highlight the historical costs and book values but not the current market values. All the market leaders go through the business’s net worth to check the financial health of the business before investing.
The creditor looks at the net worth of the business before offering it loans as it defines the ability to repay the loan amount. The rising net worth is the hint of the increased profit-making of any business. However, these earnings shouldn’t be fully distributed to shareholders. If a public company has to define its net worth, the rising book value hints at the increase in the stock price value.
What is the importance of net worth?
When it comes to the importance of net worth for any business or personal finances, the first and foremost thing is to calculate the financial health of the entity. Individuals or businesses may have been earning but it is all about what happens next when the paycheck hits the bank account and the time comes to calculate what is saved after paying all the liabilities. If said in simple words, the net worth is all about understanding where the whole money has come from in the past and where does it has gone.
Hence, knowing the previous money history or the previous net worth helps individuals make crucial decisions. You may be looking for hitting a new savings target, taking out debt to go for higher studies, buying a new car, planning for a new home, etc. Hence, for individuals, net worth is important to make the necessary decisions involving great financial amounts in lifelike loans, purchasing big items like cars, homes, etc. Credit scores play an important role whenever individuals are looking to get some loans. The net worth helps determine the safest limits of the loans based on the credit scores.
For businesses, net worth is the crucial factor that helps them attract investments or remain neglected by the leading investors. The negative net worth hints that the businesses may not be able to repay the loans and hence investors tend to remain to stay away from such businesses. The positive net worth, on the other hand, hints at the financial stability of the company and hence attracts a set of worthy investors.
Wrapping Up:
People interested in learning more about economics and finances can go for calculating their net worth and know all about its importance. The time is gone when the net worth was thought to be a thing of billionaires only. Whether it is about knowing your yearly balance sheet or learning the credit score for managing finances, your net worth can help you know all about the technical terms easily.
