how to calculate net worth
net worth is calculated by subtracting all liabilities from all assets an asset is anything owned that has monetary value liabilities are obligations that deplete resources they include loans accounts payable ap and mortgages net worth can be described as either positive or negative positive net worth means that assets exceed liabilities negative net worth indicates that liabilities exceed assets positive and increasing net worth indicates good financial health decreasing net worth is cause for concern because it might signal a decrease in assets relative to liabilities the best way to improve net worth is to either reduce liabilities while assets stay constant or rise or increase assets while liabilities either stay constant or fall net worth can be applied to individuals companies sectors and even countries net worth in businessnet worth is known as book value or shareholders equity in business the balance sheet is also known as a net worth statement the value of a company s equity equals the difference between the value of total assets and total liabilities the values on a company s balance sheet highlight historical costs or book values rather than current market values lenders scrutinize a business s net worth to determine whether it s financially healthy a creditor might not be too confident in a company s ability to repay its loans if total liabilities exceed total assets a consistently profitable company will register a rising net worth or book value provided that these earnings aren t fully distributed to shareholders as dividends a rising book value will often be accompanied by an increase in the value of a public company s stock price net worth in personal financean individual s net worth is the value that s left after subtracting liabilities from assets liabilities include debts like mortgages credit card balances student loans and car loans liabilities can also include obligations such as bills and taxes that must be paid an individual s assets can include checking and savings account balances the value of securities such as stocks or bonds real property value and the market value of an automobile the net worth is whatever s left after selling all assets and paying off personal debt people with substantial net worth are known as high net worth individuals hnwi they form the prime market for wealth managers and investment counselors investors with net worths of at least 1 million either alone or together with their spouse and excluding their primary residences are accredited investors in the eyes of the securities and exchange commission sec they re permitted to invest in unregistered securities offerings the value of personal net worth includes the current market value of assets and current debt costs example of net worthconsider a couple with the following assets liabilities include the couple s net worth would therefore be calculated like this assume that the couple s financial position changes five years later the residence value is 225 000 the investment portfolio is 120 000 savings total 20 000 and automobile and other assets are valued at 15 000 their mortgage loan balance is 80 000 and the car loan is 0 because it was paid off their net worth five years later would be the couple s net worth has gone up by 35 000 despite the decrease in the value of their residence and car these declines were more than offset by an increase in assets by adding the investment portfolio and savings as well as a drop in liabilities owed negative net wortha negative net worth results if total debt is more than total assets their net worth will be negative if the sum of an individual s credit card bills utility bills outstanding mortgage payments auto loan bills and student loans is higher than the total value of their cash and investments negative net worth is a sign that an individual or family needs to focus its energy on debt reduction a tough budget the use of debt reduction strategies such as the debt snowball or debt avalanche and perhaps negotiation of some debts with creditors can sometimes help people climb out of a negative net worth hole and start building up their resources a negative net worth isn t uncommon early in life student loans mean that even the most careful with money young people can start out owing more than they own family responsibilities or an unexpected illness can also push people into the red filing for bankruptcy protection to eliminate some of the debt and prevent creditors from trying to collect on it might be the most appropriate solution when nothing else has worked some liabilities can t be discharged however they include child support alimony taxes and often student loans and many types of bankruptcy will stay on an individual s credit report for 10 years 1