Net worth is the value of all the non-financial and financial
asset
In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
s owned by an individual or institution minus the value of all its outstanding
liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net worth can also be conveniently expressed as non-financial assets plus net financial assets. It can apply to companies, individuals, governments or economic sectors such as the sector of financial corporations or to entire countries.
By entity
Calculation
Net worth is a combination of financial assets and liabilities. The financial assets that contribute to net worth are homes, vehicles, various types of bank accounts,
money market accounts, and stocks and bonds. The liabilities are financial obligations such as loans,
mortgage
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...
,
accounts payable
Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. An accounts payable ...
(AP) that deplete resources.
Companies
Net worth in business is also referred to as
equity
Equity may refer to:
Finance, accounting and ownership
* Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the dif ...
. It is generally based on the value of all assets and liabilities at the
carrying value
In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Tra ...
which is the value as expressed on the
financial statements
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...
. To the extent items on the
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
do not express their true (market) value, the net worth will also be inaccurate. On reading the balance sheet, if the accumulated losses exceed the shareholder's equity, net worth becomes negative.
Net worth in this formulation does ''not'' express the
market value
Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market value'', although the ...
of a firm; a firm may be worth more (or less) if sold with a
going concern
A going concern is a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the spec ...
.
Net worth vs. debt is a significant aspect of business loans. Business owners are required to "trade on equity" in order to further increase their net worth.
Individuals
For individuals, net worth or wealth refers to an individual's net economic position: the value of the individual's assets minus liabilities. Examples of assets that an individual would factor into their net worth include retirement accounts, other investments, home(s), and vehicles. Liabilities include both secured debt (such as a home mortgage) and unsecured debt (such as consumer debt or personal loans). Typically intangible assets such as educational degrees are not factored into net worth, even though such assets positively contribute to one's overall financial position.
For a deceased individual, net worth can be used for the value of their
estate when in
probate
Probate is the judicial process whereby a will is "proved" in a court of law and accepted as a valid public document that is the true last testament of the deceased, or whereby the estate is settled according to the laws of intestacy in the sta ...
.
Individuals with considerable net worth are described in the financial services industry as
high-net-worth individual
High-net-worth individual (HNWI) is a term used by some segments of the financial services industry to designate persons whose investible wealth (assets such as stocks and bonds) exceeds a given amount. Typically, these individuals are defined ...
s and
ultra high-net-worth individual
Ultra-high-net-worth individuals (UHNWI) are defined as having a net worth of at least US$30 million in constant 2018 dollars. It is the wealth segment above very-high-net-worth individuals (greater than $5 million) and high-net-worth-individu ...
s.
In
personal finance
Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.
When planning personal fi ...
, knowing an individual's net worth can be important to understand their current financial standing and give a reference point for measuring future financial progress.
Governments
Balance sheets that include all assets and liabilities can also be constructed for governments. Compared with government debt, a government's net worth is an alternative measure of the government's financial strength. Most governments utilize an accrual-based accounting system in order to provide a transparent picture of government operational costs. Other governments may utilize cash accounting in order to better foresee future fiscal events. The accrual-based system is more effective, however, when dealing with the overall transparency of a government's spending. Massive governmental organizations rely on consistent and effective accounting in order to identify total net worth.
Countries
A country's net worth is calculated as the sum of the net worth of all companies and individuals resident in this country, plus the government's net worth. As for the United States, this measure is referred to as the
financial position, and totalled $123.8 trillion as of 2014.
[Federal Reserve . "Z.1 Financial Accounts of the United States - Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts - First Quarter 2014" (PDF).]
Importance
Net worth is a representation of where one stands financially. This can be used to help create budgets, influence wise spending, motivate one to pay off debt, and it can motivate someone to save and invest. Net worth is also important to look at when considering
retirement
Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload.
Many people choose to retire when they are elderly or incapable of doing their j ...
.
See also
*
Net operating assets Net operating assets (NOA) are a business's operating assets minus its operating liabilities. NOA is calculated by reformatting the balance sheet so that operating activities are separated from financing activities. This is done so that the operati ...
References
External links
Net Worth Calculator
Personal finance
Balance sheet
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