Have you been recently told to provide details of your net worth? The net worth is the value of everything that is owned by the individual or the business. Being a clear indicator of the financial health of a person or the company, net worth is much talked about when it comes to loans or other major financial transactions. Let us know all about it and have a detailed overview of the net worth.
Definition of net worth:
Starting with the quick definition, many of us know that it is the simple subtraction of all liabilities from the total assets of a person or the company. Hence, it is the value of the cash that remains after paying the debts from the available sources. It is important to know the value of assets and liabilities.
The common assets include stocks, mutual funds, other investments, jewelry, collectibles, personal property, home value, car value, cash in bank accounts, etc. The common liabilities include credit card balances, car loans, student loans, mortgages, etc.
Hence, net worth is defined as the total value of the financial and non-financial assets while subtracting all possible liabilities. It is important to keep track of the yearly net worth to get the financial performance of the individual or the company. All you need to do is remain true to the estimates while making detailed calculations of the assets, liabilities, and net worth.
Example of net worth:
Let us have a quick look at one of the net worth example.
Calculate the couple’s net worth if the following are given:
Assets: Primary residence valued at 200,000USD, an investment portfolio with the market value of 50,000USD, automobiles, and other assets of 25,000USD.
Liabilities: Car loan of 10,000USD and the outstanding mortgage balance of 100,000USD.
The net worth of the couple
= 200,000 + 50,000 + 25,000 – (100,000-10,000)
= 165,000 USD.
How does net worth work?
The net worth is important for many reasons like establishing financial stability, determining the financial goals, and preparing for the big finances in your life. While there is no fixed number for the ideal net worth, it is all about keeping it as high as possible and especially on the positive side. Hence, there is no number game in the net worth. It is easy to keep a strict check on the net worth that can be calculated from one year to the other. It gives a clear idea of the financial progress. It is easy to stay afloat in the possible situations of financial concerns as you can estimate whether your finances are growing or deteriorating over time.
Hence, the net worth works ideally for personal benefits or businesses. Businesses can get the net worth to give the assurance to the lender and get the loan according to the financial needs. The lenders can know the value of the asset liquidation if the business is not able to repay the loan. When coming to the net worth of individuals, it helps them plan crucial finances like purchasing the dream car or dream home. Further, individuals can go for loans that also require precise net worth.
Whether it is individuals or businesses, net worth works in the right way in determining the financial stability of the entity. The net worth gives a clear estimate of the cash value that is left from the value of the assets after paying the current debts or total liabilities. It is different from the net incomes that only take the incoming finances into consideration.
Many lenders, banks, or other financial institutions keep net worth as the important factor in offering or refusing the loan to the applicant. A positive net worth hints at the low-risk loans while the negative net worth hints at the high-risk loans that may call for the additional covers.
Three-step net worth calculations:
If you think that net worth calculations are tough for you, think again as it is only a three-step process that goes like this:
Calculate the assets- Add all the different assets that cover:
Large assets: It is easy to start by calculating the largest assets that can be the value of your home, car, vacation home, real estate properties, etc. It is important for businesses to note all the possible assets and calculate the amount near to precision. The estimates if any, should be realistic and backed by the financial data.
Liquid assets: It includes the savings account, checking account, cash, CDs, retirement accounts, brokerage accounts, etc.
Valuable personal property: It is the second step in calculating the assets and involves the value of jewelry, rare wine collection, heirlooms, musical instruments, coin collections, etc. It is easy to calculate these assets by adding all items that are above the 500USD value.
Calculate the liabilities- Add all the different liabilities that cover:
Major debts: The main debts include the balance on the mortgages or the home loans, car loans, etc. It is important to list the main loans and calculate the pending balances.
Personal debts: It includes personal liabilities that include personal loans, student loans, credit card pending payments, etc. It is important to add all the personal debts.
Calculate the net worth
The first step in the net worth calculations is to subtract the total liabilities from the total assets. The value thus obtained is the net worth that has no minimum or maximum value but hints at the right financial condition of the person or the business.
This calculation of the net worth should be repeated yearly to establish the financial development or depreciation accordingly. It is easy to determine financial stability by comparing the net worth of the person or company in two consecutive years.
It is easy for the common person to understand the net worth details and do all the necessary calculations. There is no need to seek professional financial guidance when you can do it all alone without any additional financial knowledge. It is quick and easy to understand net worth with our quick overview of all its key takeaways.