Net worth: what is it and how to calculate it
Calculating net worth isn't just for the likes of Elon and Rihanna.
👋🏼 everyone,
This week I'm picking apart the term 'net worth' - a term you often only come across in the context of news stories about Elon Musk, Warren Buffet and 'world's richest' type articles 🧐
I find this super annoying. Why?
Because it alienates the average person and regardless of your wealth, understanding your net worth is actually a super helpful metric to monitor your finances and embrace reality - regardless of the situation you’re in.
So let's dive in!
(Quickly) explained…
Net worth is the total value of all your assets (things you own that have monetary value, such as cash, investments, property, and possessions) minus the total amount of all your liabilities (debts and other financial obligations).
In other words, net worth is what you would have left if you sold everything you own and paid off all your debts.
💰Simple calculation of net worth:
Let’s consider a couple with the following assets:
Their main 🏡, valued at $550,000
Investments (shares and digital assets) with a current market value of $70,000
Two cars worth $40,000 in total
Other assets (jewellery, laptops, artwork) valued at $20,000
🤔 Liabilities include:
An outstanding mortgage balance of $200,000
A 🚗 loan of $20,000
The couple's net worth would, therefore, be calculated as:
[$550,000 + $70,000 + $40,000 + $20,000] - [$200,000 + $20,000] = $460,000
🌝 Why knowing your net worth is important:
It’s a reality check ✅ – seeing the results of your net worth calculation forces you to confront the realities of where you stand financially - you could be earning $200k per annum, but have debts of $500k. If you focus only on your income, you might think you're in a very good position, but, if you had to retire tomorrow for, let's say, ill health, you could be in a real pickle.
Encourages debt reduction 📉– reviewing your assets and liabilities can help you develop a plan for reducing your debt.
📄 It gives you a reference point for measuring progress toward your goals - -ideally, your net worth will grow as you continue to earn and save. If your net worth is low (or in the red), you'll need to work on saving more and spending less. To keep track of how you're doing, calculate your net worth now and re-calculate it once or twice a year.
Net worth explained…in 55 seconds!
🙋♀️ Tools help you calculate your net worth:
Thanks for reading 🙏 if you found this helpful and enjoyed the post, I’d be super grateful if you could hit the ❤️ below - thank you!
DISCLAIMER: None of this is financial advice. Concepts of Finance newsletter is strictly for educational purposes.