What is net worth?
The net worth is the difference between your assets and liabilities. You can calculate yours by adding up all of the money or investments you have, including the current market value of your home and car, as well as the balances in any checking, savings, retirement or other investment accounts.
Then subtract all of your debt, including your mortgage balance, credit card balances and any other loans or obligations.
The resulting net worth number helps you take the pulse on your overall financial health.
A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, patents and intellectual property. Tangible net worth is calculated by taking a firm’s total assets and subtracting the value of all liabilities and intangible assets.
Are you still wondering what does net worth mean? Maybe you did not understand net worth meaning from the above explanation. The following practical example will make it clear.
Now that you are aware what is net worth based on, let us find out how it is calculated.
How to Calculate Your Net Worth
Monitoring your net worth is a good way to get a quick snapshot as to whether or not you are improving your financial situation over time.
Before you can delve into calculating net worth, you ought to know what is net worth.
Your net worth is simply what you own minus what you owe. What you own are your assets and what you owe are your liabilities.
I’ll start with a simple example before we dig a little deeper. Let’s suppose John wants to calculate his net worth , he will start by listing all his assets.
|Checking Account||$5,000||Credit Cards||$3,000|
He has a $300,000 home, a $20,000 car, $5,000 in a checking account and $15,000 in his tax-free savings account. Adding up all his assets, what he owns comes to $340,000.
Next he’ll list all his liabilities. He has a $200,000 balance remaining on his mortgage, his car alone has a balance of $15,000, he carries $3,000 on his credit cards from month to month and he has a student loan of $27,000. Adding up all his liabilities what he owes comes to $245,000.
Now when we take what he owns; $340,000 and subtract what he owes; $245,000 John’s net worth is $95,000.
Now that we know what is net worth and the basics of calculating net worth, let’s think about how we can use it perhaps once per year.
John could recalculate his net worth to see if his financial situation is improving or not. The following year his house has appreciated to $310,000 but his car is depreciated to $17,500, he still has $5,000 in his checking account but he tapped into his TFSA and it’s now empty. The new total for his assets is $332,500.
|Checking Account||$5,000||Line of Credit||$20,000|
He’s reduced the balance owing on his mortgage to $190,000, the car loan is now $12,500 and he paid off his credit card by opening up a line of credit. He also used his line credit to pay for a vacation and a new roof for the house so the balance here is $20,000, his student loan is now $24,000 and his liabilities now total $246,500.
His new net worth is $86,000, which is $9,000 worse than last year.
Generally speaking, you’ll want to focus on increasing your net worth during your working career by either increasing the value of the assets side or decreasing the value of the liability side.
It is also good to compare your net worth with that of others as this is likely to give you some motivation. However, you should ensure that you are making a comparison with people on the same age bracket for you to have a realistic picture.
After reading this section, I hope now you will not be asking the question “what is net worth formula.”
Here are a few more things to keep in mind on what is net worth
- Large assets may fluctuate in value and result in a decrease in net worth even though you’re doing all the right things with managing your money. For example, the value of John’s house may decrease by $20,000 in a year which would be a drag on his net worth. The same could happen with a long term investment portfolio which can go up and down in value over the short term.
- RRSPs (registered retirement savings plans) have a future tax liability attached to them. When you take money out of your RRSP or RIF it’s treated like income and subject to income tax. That means if your RRSP is worth $200,000 you likely won’t get to spend $200,000. Some people choose to estimate the future tax liability on the liability side of the net worth calculation while others ignore it.
- It’s possible to have a big house and fancy cars but have a low net worth because you owe a lot of money. Similarly it’s possible to have a modest house and unremarkable cars and have a high net worth. It’s impossible to judge this book by its cover but knowing how to calculate and monitor your own net worth is a basic tool of financial literacy that you should understand.
I hope you have learned something on what is net worth and how to calculate your net worth. Now something to ponder is what is your net worth?