What is net worth: definition, calculation
In this article we will tell you what net worth is and what this indicator of personal capital means. You will learn how to calculate net worth, the dangers of its negative value, and how you can improve your own financial situation.
Net worth: what is it
Net worth is the net estimated amount of an individual's assets/liabilities. Accordingly, this is the difference between various types of assets, property (car, apartment, shares, land) and debts of this individual (bank loans, mortgage debt).
How to calculate net worth
When calculating net worth, assets may include:
- real estate at market selling price;
- cars at market selling price;
- money in bank accounts or in cash;
- valuable metals and jewelry at selling price;
- collectibles (stamps, coins, etc.) provided there is a secondary market for their sale;
- company shares, bonds, deposits, and other financial assets, including loans issued to others.
net worth, liabilities include:
Thus, when calculating, a person can understand how much assets he actually has, clearing this figure from his liabilities. This calculation follows from the accounting principle, where:
Assets - Liabilities = Equity
Within the framework of this comparison, net worth is precisely “own capital”.
Financial self-esteem and budgeting basics: where to start
As part of financial planning, it is important to understand that your monthly income is not pure: you eat, pay for utilities, buy medicine and cover your needs. It’s the same for a business: your net profit is the money left over after closing the business’s needs.
Thus, the money remaining in your hands after the reporting period (usually in personal finance this period is considered a month, because most people receive a salary, and it is paid once a month) is considered capital gain. But provided that you covered only your basic needs this month. If, for example, you bought clothes, household appliances, etc., then as part of calculating your net worth, you can include these items in the asset line. It is important to note that in this case, these assets must be included at the cost of sale and, accordingly, if the item is new, its purchase will lead to a decrease in net worth , because you bought a new item, but account for it as used.
At the same time, the main purpose of forming net worth for an ordinary individual is pension savings. The solidary pension system of Ukraine is reaching its last years and counting on the return of funds invested in pension savings is not the most competent financial strategy.
In this case, one of the best financial decisions for any person is the formation of independent pension savings. And in this paradigm net worth — one of the key indicators. It allows you to understand the monetary cost of liquidating the majority of your assets and what financial cushion you have to live in old age.
Read also: How to start investing in Ukraine in 2023
What are the possibilities of non-negative net worth
Net worth, the value of which is non-negative, allows:
- create a financial cushion in case of unforeseen circumstances;
- to generate initial capital for investment or to start your own business.
It is important to remember that in addition to a simple sale, you have the opportunity to borrow against assets for different periods. For example, if you have a sufficient portfolio of government bonds in Ukraine, and you need money for a week (some cash flow is not keeping up, or you urgently need money now, and you are sure you will have it in a week), then operations are available to you REPO.
You can take out a loan secured by your government bonds and return it after a certain time at a pre-agreed rate, which is usually lower than the rate on a bank loan, including lower than a loan secured by an apartment. The lower rate is explained by the fact that the bank does not particularly need your apartment due to the problematic level of liquidity, but government bonds are more interesting for the bank due to the high level of liquidity. Accordingly, the lending rate will be lower for you, and for the bank the risk profile of such a loan will also be lower.
FC Daliz-Finance LLC has the ability to both purchase military bonds on the secondary market and has experience in purchasing military bonds through primary dealers. In the first months of the war, our clients bought war bonds worth more than 500 million hryvnia. Join their number by leaving a request on our website.
What to do if your net worth is negative
Negative net worth is dangerous for bankruptcy. But it is also important to understand the reasons for this situation. Let us explain more precisely what net worth with a minus is using a simple example.
One of your neighbors lives in a rented apartment, borrowed money from a friend and ate well — his financial situation is unenviable. And another neighbor took out bank loans secured by an apartment, borrowed cash from relatives and friends to open his own business. Although at this moment his net worth is negative, but for these debts he acquired an asset, the growth in value and cash flows from which, perhaps, will cover the negative in the future.
Therefore, it is important to understand the source of negative net worth and act accordingly. It is worth mentioning that if you are stuck with loans, consider contacting a specialist who can help you structure your obligations and develop a plan for repaying them.
How to increase net worth: tips
Net worth, the value of which is negative, is quite easy to increase — you need to have more profit than costs. Methods for this may be different: Методи для цього можуть бути різні:
- increasing your salary through an increase/discussion with the employer;
- change of workplace;
- searching for profitable assets to invest as part of your investment strategy;
- refinancing under more attractive conditions;
- deliberate reduction in living standards;
- seeking a more financially sustainable lifestyle.
Frequently asked questions: what is net worth
Does net worth indicate wealth
Net worth is not only money in the bank account, it is also the potential to increase the amount of money in the bank account without incurring obligations.
Who has the highest net worth in the world
According to the Forbes rating, today the person with the largest net worth in the world is Elon Musk.