You likely often hear mentions of celebrities being worth 10 million dollars or like Elon Musk being worth a reported 274 Billion. But how is net worth calculated? And how much are you worth?
When people discuss net worth, it essentially means the value of that individual or company, or rather being the summation of all assets and all debts held.
The Formula for net worth
The formula for net worth is basically adding up all your assets, like house, car, bank account, etc. and subtracting off all liabilities or debts. Generally, people either have a positive or negative net worth. If someone’s worth it is negative, it means that they owe more debts than they have in assets. While this can happen, it’s definitely a scenario that you or your company want to avoid.
In the case of companies, net worth is used partially to determine share price or how much debt the company can take on from banks. Lenders like banks will calculate net worth to determine how much liability they’re taking on by giving a company a loan.
Personal net worth on the other hand, is in most cases a vanity metric used to portray how wealthy someone is, but it can have implications to the loans you’re able to get or be used to determine personal financial goals for the future.
Examples of personal liabilities, or debts, include mortgages, credit card debt, student loans, personal loans, and car loans. Personal assets include bank balances as well as the value of stocks and bonds, property value, market value of cars, and the market value of selling off everything else you own.
Calculating worth example
For example, if you wanted to calculate your worth, it might look something like this.
Your house is worth $250,000. Your investment portfolio is worth $50k, your cars are valued at $30k. Summing all of this up, you total assets are valued at $330K. Now to sum up your liabilities. You might owe $150K on your mortgage, and still owe $20K on your cars. This means the sum of your liabilities are 170K.
Now, it’s just simple subtraction - 330K minus 165k is 160K. That means your net worth is 160K!
Now, since net worth is dependent upon the value of things, as the value of cars and houses changes, so too does an individual's net worth.
Higher worths can be used as a target for individuals looking to pay off debts, or simply as financial goals to reach at a given age. So that’s it, calculating worth is fairly simple, but at the end of the day, it helps give a quick concise picture of your financial health.