Net worth is an indicator of your financial condition. Take everything you own and subtract it from everything you owe. The result is your net worth.
Net-worth = Total Assets – Total Liabilities
In layperson terms, if you sell whatever you own today and then pay all your debts with that money, then the money left after is your net worth.
Total assets are collections of all the things you own, and on selling them, you will get an amount. Some of the typical assets owned by various people are cash, property, jewellery, vehicles, retirement plans, mutual funds, stocks, life insurance policies etc.
Total liabilities are the sum of values of all the things you own or have borrowed, and you have to pay them back to their actual lender. A few usual liabilities are education/student loans, mortgage loans, credit card debts/bills etc.
There are various calculators available online that help you calculate your net worth.
Net worth is a mathematical value and, therefore, it can either be positive or negative. When the sum of all your assets is greater than the total of all your liabilities, then your net worth will be positive. If the sum of all the liabilities is greater it will be negative.
What if your net worth is negative?
Negative net worth has nothing to worry about; most people at the start of their careers have a negative net worth. With graduating and starting their first jobs, most people have liabilities that are more than assets.
To turn your negative net worth around, start investing and paying off all your debts. Getting rid of all your debts will positively impact your net worth more than investing. Therefore, make a strict discipline of paying all your bills on time. Form an investment cycle and follow it diligently, as it will ensure that your net worth is never back in the red again.
Things to remember while studying your net worth:
- Your net worth does not depend on your income – There are a lot of hypotheses to prove that your net worth is income-dependent, but all of them have been proved wrong. The reason behind the failure of these hypotheses is: that even if you have low income or fewer holdings, and if your liabilities are lesser, then your net worth will be high or positive. Similarly, if you earn a high income or have higher holdings, but your debts are higher, your net worth will be low or negative. Ultimately, getting rid of all your debts first will always have a positive impact on your net worth.
- Your net worth is not your self-worth – It is good when your net worth is positive and is heading upwards. However, if your net worth is negative, it does not deem one as a failure. It is different from what your potential is and what you can do. Your net worth is just a number; it cannot show your actual capabilities. So, whether your net worth is positive or negative, do not let it affect you personally.
- Keep calculating your net worth – Make a habit of calculating your net worth every year or every six months. Doing this will help you track your financial situation, and it will tell you the direction of the financial goal you set.
The bottom line is simple, subtract all your debts/liabilities from all your holdings/assets; the result will be your net worth. Calculating one’s net worth can be tricky sometimes. A surefire way is to use the easily available online calculators. Also, your net worth is not an apt indicator of all your potential. So, never get cheated by it.