Definition and Example of Net Worth
Net worth is the value of everything you own, including your financial and non-financial assets, minus any debts you have.
Net worth is the total value of owned assets minus total liabilities. Net worth can be calculated for individuals, families, businesses, industries, and public entities such as cities or countries. Net worth provides an overview of an individual’s financial health and helps determine whether they are making progress toward later financial goals over time. Business net worth is also referred to as shareholder equity.
How Does Net Worth Work?
Knowing your net worth is important because it can be a valuable indicator of your financial situation. When tracked year after year, net worth can show whether an individual or company is overall improving its financial health.
Once you calculate your net worth, a plan can be developed to increase it gradually. This can be done by saving more money, paying down debt, increasing your investments, or noticing an increase in the value of assets such as your home.
Note: The value of your home is a key part of the net worth calculation. Get an estimate of your home’s current value by entering your address into an online home value estimator, asking a local real estate agent for a comparative market analysis, or hiring a professional appraiser.
Net worth is not calculated for the purpose of comparing financial health with others, but to help you assess your progress in increasing your net worth from year to year. In retirement, a spending strategy may allow for a decline in your net worth year after year as long as your savings will last throughout your lifetime.
Initially, calculating net worth may require gathering a large amount of information, but it should be easier in subsequent years if you keep all that information in a safe place.
Types of Net Worth
Net worth can be calculated for families, companies, industries, and government entities such as cities and states or countries. Business net worth is usually referred to as “shareholders’ equity.” It is the total amount of assets that will belong to shareholders once the company’s debts and obligations are paid off.
Companies and public entities regularly calculate net worth for the same reasons that individuals and families do: to measure financial health, to indicate when measures should be taken to improve financial health, and to help assess progress in improving financial health. A consistently profitable company is likely to increase its net worth, which is often accompanied by a rising stock price.
What Does Net Worth Mean for Families?
Net worth provides individuals a way to assess their financial health and set future goals. Ideally, net worth should increase over time. A negative net worth is not a cause for panic for young people who may be burdened with student loans, car loans, and daily living expenses while earning an entry-level salary in their chosen profession.
There is no “correct” net worth figure to aim for. National averages can provide something to measure your financial situation against. The median net worth for all American families was $121,700 in 2019, according to the Federal Reserve’s Survey of Consumer Finances.
Monitoring net worth can help in making financial decisions and assessing progress. Reducing or eliminating debt is a good way to increase net worth, but it is important to remember that a sound personal finance strategy often includes both investing and paying off debt simultaneously.
Source: https://www.thebalancemoney.com/what-is-your-net-worth-1289788
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