What Is Net Worth, How To Calculate It And The Examples
Many people take net worth as the way to measure one’s wealth. While it’s true in some senses, it is only an estimation since it only covers a brief positive and negative conversion. Someone with a positive net means they have more assets than liabilities. Therefore, someone with more debts than assets will have a negative value. If you want to learn more about net worth, make sure to check this article.
What is Net Worth and Why You Need to Know
Net worth is a financial term that refers to the total value of a person’s assets minus their liabilities. It is a way of measuring an individual’s financial health and provides insight into their overall financial standing.
Net worth is often used by financial advisors, investors, and lenders to evaluate a person’s financial position. In simpler terms, net worth is the amount of money you would have left if you sold all your assets and paid off all your debts.
It is a measure of your financial worth and can be used to track your progress towards achieving financial goals. Knowing your worth and what you can do to increase it is the basis for an efficient financial plan.
How to calculate it and examples
To calculate your net worth, you need to evaluate all of the assets and liabilities in your name and subtract the liabilities from the assets. Proper evaluation is crucial to determine your true worth. It’s important to note the clear division between assets and liabilities.
Cash, savings, and investments are considered positive assets that contribute to your net worth. However, if you buy a house and still have a mortgage to pay, the house becomes a liability until you pay off the mortgage and become a homeowner. The same principle applies to cars and other valuable possessions.
Here are several examples to illustrate the calculation process. Once you understand what needs to be calculated and taken into account, it becomes straightforward.
Let’s consider Anna. She owns a house worth $300,000 and a car worth $25,000. However, she still has a student loan of $100,000 and $50,000 in credit card debt.
To estimate her net worth, we can calculate it as ($300,000 + $25,000) – ($100,000 + $50,000), which equals $175,000.
Now let’s look at David, a recent graduate who has a student loan of $150,000. He does have savings of $20,000. Therefore, his net worth is $20,000 – $150,000, resulting in -$130,000.
While having a negative net worth may seem alarming, it is quite common among young individuals who are just starting out. With the right mindset and strategies, they can turn their negative net worth into a positive one over time.
What you can do to increase your worth
Here are several things that you can do to increase the values.
1. Invest and Save
The very first thing you must include in your financial plan is to prioritize savings. Savings play a crucial role in building your overall asset base. It’s important to consider various types of savings, including contributions to your 401(k) plan and making deposits into savings accounts.
When you opt for investments as your primary savings method, it’s essential to focus on longevity and risk rather than solely on the potential returns. Investments with higher returns often come with higher risks as well.
2. Work Toward Less Debt
Credit cards can certainly be useful for making purchases, but it’s important to be mindful of the amount you spend and cultivate a habit of spending less. One way to start is by using debit or prepaid cards for your expenses.
This approach can contribute to better expense management and ensure timely repayment of your debts, supporting your overall financial plan. As you can see, everyone has the opportunity to achieve a positive net worth. With the right strategies and effective management, you can work towards reaching your financial goals successfully.
Curious About How Much Is Your Net Worth?
Once you know your net worth, it’s important to manage it carefully to achieve your financial goals. You can try budgeting, do investment or save regularly.
If you want to learn more about economics, business, and how to make money online in Nigeria, make sure to check the tips in Vincoguide. We also provide several business related articles you should read to be rich.
