What Is Net Worth?
Net worth is a person’s or a company’s total assets minus their total liabilities. It is a measure of financial health used to determine the value of a person’s or company’s assets.
For an individual, net worth is calculated by adding up the value of all their assets (such as cash, investments, property, and personal possessions) and subtracting any debts or liabilities (such as loans, mortgages, and credit card balances). The resulting number is their net worth.
For a company, net worth is calculated similarly by adding the value of all its assets (such as cash, investments, property, and equipment) and subtracting any debts or liabilities (such as loans and bond obligations). The resulting number is the company’s net worth, also known as shareholder or owner’s equity.
Net worth is an important measure of financial health because it reflects the number of assets a person or company has available to pay their debts and meet their financial obligations. It is a useful way to compare the financial position of different individuals or companies.
How to Calculate Net Worth
To calculate an individual’s net worth, follow these steps:
- Make a list of all your assets, including cash, investments, property, and personal possessions. Estimate the current value of each asset.
- Make a list of all your debts and liabilities, including loans, mortgages, and credit card balances. Make sure to include the current outstanding balance for each debt.
- Add up the total value of all your assets.
- Add up the total value of all your debts and liabilities.
- Subtract your total liabilities from your total assets. The resulting number is your net worth.
For example, if you have $50,000 in cash, investments worth $30,000, and property worth $100,000, and you have a mortgage with an outstanding balance of $50,000 and credit card debt of $10,000, your net worth would be calculated as follows:
Total assets: $50,000 + $30,000 + $100,000 = $180,000
Total liabilities: $50,000 + $10,000 = $60,000
Net worth: $180,000 – $60,000 = $120,000
To calculate a company’s net worth, follow a similar process: add the value of all its assets and subtract its total liabilities.
How to calculate Net Worth in Business?
To calculate a company’s net worth, also known as shareholder equity or owner’s equity, follow these steps:
- Make a list of all the company’s assets, including cash, investments, property, and equipment. Estimate the current market value of each asset.
- Make a list of all the company’s debts and liabilities, including loans, bond obligations, and accounts payable. Make sure to include the current outstanding balance for each debt.
- Add up the total value of all the company’s assets.
- Add up the total value of all the company’s debts and liabilities.
- Subtract the total liabilities from the total assets. The resulting number is the company’s net worth.
For example, if a company has $100,000 in cash, investments worth $200,000, property worth $500,000, and equipment worth $300,000, and it has a loan with an outstanding balance of $150,000 and bond obligations of $100,000, its net worth would be calculated as follows:
Total assets: $100,000 + $200,000 + $500,000 + $300,000 = $1,100,000
Total liabilities: $150,000 + $100,000 = $250,000