Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. It serves as a crucial metric to gauge a company’s financial well-being, giving a snapshot of its current financial position.
When you better understand your net worth, you can use it to qualify for unique investment opportunities or financial products like hedge funds, structured products, or other complex or alternative investments. In social contexts and popular culture, net worth has become a benchmark for ranking the wealthiest individuals and celebrities.
Key Highlights
- Net worth measures the value of an entity and applies to individuals, companies, sectors, and even countries.
- It provides an overview of an entity’s current financial position.
- In business, net worth is also known as book value or shareholders’ equity.
- Those with substantial net worth are termed high-net-worth individuals (HNWI).
Example, Elon Musk currently boasts the highest net worth of any individual on the planet.
How to Calculate Net Worth
Net worth is determined by subtracting liabilities from assets. An asset is anything owned that has monetary value, while liabilities are obligations that consume resources, such as loans, accounts payable (AP), and mortgages.
Formula:
Net Worth = Total Assets - Total Liabilities
- Positive Net Worth: Assets exceed liabilities (indicator of good financial health).
- Negative Net Worth: Liabilities exceed assets (cause for concern).
How to Improve Net Worth
Focus on either reducing liabilities while maintaining or increasing your assets or, better yet, increasing assets while reducing liabilities.
Net worth can apply to various entities, including individuals, organizations, sectors, and even countries.
Net Worth in Business
In the business world, net worth is often known as book value or shareholders’ equity. A company’s balance sheet is essentially a net worth statement. Here, the value of equity equals the difference between total assets and total liabilities. Note that these values often represent historical costs instead of current market values.
Lenders scrutinize a business’s net worth to ascertain its financial health. If liabilities surpass assets, confidence in the company’s capability to repay loans diminishes.
A profitable company typically sees a rising net worth or book value, provided earnings aren’t fully distributed as dividends. Often, this is reflected in an increasing stock price for public companies.
Net Worth in Personal Finance
For individuals, net worth is calculated by subtracting liabilities (debts) from assets (anything valuable owned).
Liabilities Include:
- Debts like mortgages, credit card balances, student loans, and car loans.
- Financial obligations like outstanding bills and taxes.
Assets Include:
- Bank account balances (checking and savings).
- Investment securities (stocks and bonds).
- Real property value.
- Market value of automobiles.
People with significant net worth are known as high-net-worth individuals (HNWIs) and are prime targets for wealth managers and investment advisors. Investors with a net worth, excluding their primary residence, of at least $1 million—either alone or with a spouse—qualify as
Related Terms: Asset management, financial health, high-net-worth individuals, debt management.
References
- Board of Governors of the Federal Reserve System. “Federal Reserve Bulletin. Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances”, Page 10.
- Experian. “How Much Money Should You Have Saved by Age 40?”
- Statista. “Number of High Net Worth Individuals in the United States From 2008 to 2021”.
