Net worth was a concept that was created a long time ago accidentality through an event connected to notorious fraudster Al Capone. Yes, the gangster Al Capone was convicted of tax fraud in 1932. Before he was convicted it was hard to measure all his assets and so it took him many years until he was able to calculate exactly what he was worth.
It wasn’t until 1989 the net worth formula was made official and today everyone is asking the question “what is your net worth”.
Every time you read stories about rich and famous people; their net worth is always highlighted. It is also highly regarded in the banking industry. As an ex- banker myself, before approving any credit application, I always looked at net worth of the customer. If there were any indication that the customers net worth is close to nil, no credit got approved.
Whenever we hear the word ‘net worth’, the first image that pops up into our head is, in most cases, a dollar sign. Because most of us connect net worth with money which is justified.
Net worth means net assets. Net worth is the result of subtraction of one’s total liabilities from one’s total assets.
Net Worth = Total Assets – Total Liabilities
Every individual or Corporation has their net worth. It is an important matric to represent an individual’s or company’s health providing a vital snapshot of its current financial situation.
Some experts define net worth even more broadly. According to them net worth is a summation of four different aspects namely money, health, skill, and influential power.
But here, in this article, I won’t talk about those hypotheses instead I will keep focus on the basic monetary net worth details.
In monetary net worth, the total calculation evolves around income, credit, savings, and investment.
Knowing the net worth is one of the most important aspects of personal finance. Tracking net worth will help you to know what’s holding you back from achieving your financial goals in life.
Who Should Think about Net Worth?
Net worth is essential for people from any age group as it helps you deciding how much risk is okay to take on.
It means deciding between borrowing additional money and going into debt for a college degree.
The information of your insurance management policy and planning for your estate should also be included in your net worth.
If you’re thinking seriously about passing on cash, properties, or other assets to your successor you should be careful about your debts. Because if your debt outweighs your assets it can cause complications.
This will also help you to track down your mortgage pay-off. While you’re not ready for thinking about your estate planning you can focus on deciding the value of your life insurance policies like in case of your losing income how much of your disability will be covered by the plan.
Net worth also helps you grow as a potential investor by managing your monetary events.
So, from student life to retirement net worth covers every circumstance of life.
Calculating and Monitoring Your Net Worth
Monitoring your net worth periodically is a good way to get a snapshot of your financial situation over time. Your net worth is what you own (your assets), minus what you owe (your liabilities).
What you own is your assets and what you owe is your liabilities. Before digging deeper let’s look into a simple example-
Suppose Sarah wants to calculate her net worth and for that she’ll start by listing all her assets & liabilities.
|
Assets |
Liabilities |
|
· $400,000 home · $30,000 shares · $20,000 car · $10,000 as Fixed Deposit (FDR)
|
· $10,000, car loan · $250,000 balance remaining on her mortgage · $5,000 on her credit card month to month · A personal loan of $10,000
|
Adding up all her assets, she owns $460,000 worth of Assets. And her total liabilities are $275,000.
From a quick subtraction, her net worth becomes $185,000
This is the simplest formula ever in calculating net worth.
Now let’s find out what we can do using this information. Perhaps once in a year Sarah wants to recalculate her net worth to keep an eye upon her financial condition.
Net worth calculation is a great way to see if you are growing financially.
For Sarah, several incidents can hit her net worth. The following year her house could be depreciated by $10,000, her share investment can rise by $50,000. But she still has $10,000 in her FDR and she bought a new car of $40,000 in addition.
You tell me in the comment if her net worth increased or not?
In general, people want to focus on increasing their net worth during their working career, by either increasing the value of the assets or decreasing the liability.
How can you increase your net worth?
- Do a simple check of your net worth
The first and most important way to increase net worth is by calculating it. It’s a little complicated to calculate exact net worth hypothetically, but when it comes to financial numbers it gets a bit easier.
As you can see all your debts and assets together on paper, and figure out what exactly is your worth by only looking at the numbers. Unfortunately, most people have a negative net worth (having more debt than total assets). Even though it sounds horrifying it’s not that much worst as it always can be improved.
- Start loving your budget
After getting a brief knowledge from your net worth calculation the first thing to do is to make a budget. Save your money and try not to spend more than your income. Create a budget by setting it a motto boom!
You got the perfect budget according to your own scenario. To make a budget you can follow numerous methods from out there. Amongst all the 50/30/20 rule is the most common one.
Allocate 50% of your income for your essentials like accommodation, food and beverage, while 30% should be allocated for your wants like travels and shopping and the rest should go for savings.
- Escape liabilities in every way
Get rid of anything that’s drowning you financially. To do that you can print out your bank statements and keep a note of your regular expenses.
Thus, you’ll be able to look at every single expense you’ve been going through in the past couples of months. This will help you to find opportunities to downsize your expenses.
Also try to cut out the unnecessary expenses not providing value to your life. Also selling out unimportant stuffs from home or business can bring extra cash to pay off the debts.
- Use your time to earn extra cash
It’s a hard fact that more than 60% of American can’t maintain a decent lifestyle by the wages. Most of them are living paycheck to paycheck.
Lots of people didn’t get a wage raise in the past 20 years. Some of you had a bit of pay raise, but inflation eaten that up. Nothing is helping you to raise the net worth.
It obviously signifies the importance of a raise at earning. So, for that an employee looks for other less time-consuming jobs. These might include extra gigs such as freelancing, investing etc.
Or you can constantly try to develop own skill according to the job market for managing a higher paying job. Making a skill portfolio is the best idea for that. Like, being a software engineer with great grip on marketing knowledge can help attracting the employer.
In case of having business, all you need is to be more cautious all the time and focus on learning and enlarging the business
- Emergency savings and short to mid-term goals
It’s undoubtedly a good idea to have a separated fund for emergency. At least six-month-worth living expenses should be prepared by you as you never know where life can take you to.
Besides, short goals like vacations, buying car can also be a good reason for having separated savings. Creating another fund for mid-term goals like down payment on a house is also a good way of expanding net worth and securing your financial life.
- Do long term investments whenever possible
Long-term investment is a great way to accelerate your net worth. To do this you can choose a number of ways. You can either invest directly in the stock market or buy bonds or cryptocurrency even you can also invest in mutual funds.
Before you invest your hard-earned money, educate yourself. Another profitable long-term investment is real estate.
Buying a desired house own self or multiple properties for profit are good ways to be a real estate investor.
- Start an online business
Starting an online business is a great way to increase your net worth. It doesn’t cost much to start a blog or your own consultancy business.
Internet marketing is booming. People are looking for their solutions in the net. If you have developed an expertise over the years, you can create a product around that.
In no time, you would see your net worth is skyrocketing.
Things that Should Be Considered While Monitoring Net Worth
Large assets may fluctuate in value
Sometimes, despite doing all the right things while managing your money, it will not lead you to the expected net worth growth. This happens because of the large assets such as house, company, car, machineries etc.
An example will make it clear. The value of Anika’s shares investment may decrease by $50,000 in a year which would be a drag on her net worth. The same could happen with the long-term investment portfolio which can go up and down in value over a short term.
Registered Retirement Savings Plans have future tax liability
The money taken out of your RRSP or RIF (Retirement Income Fund) it’s considered as income and subject to income tax. That means if your Registered Retirement Saving Plans is worth $2,00,000 you most likely will not get to spend the full amount. Some people prefer estimating the future tax liability on the liability side of the net worth calculation. While others prefer ignoring it.
Luxurious assets may also be the reason of decreasing net worth
Sometimes having big house or a fancy car can cause having low net worth because these can lead you to owing a lot of money. On the other hand, it’s also possible to have a modest house and an unremarkable car yet have a high net worth. So, in case of net worth, it’s impossible to judge a book by it’s cover.
Some mentionable personnel with high net worth
There are number of persons who are leading the world with their high net worth. They are from different professions yet so close to each other. Here let me mention some respective personnel.
Net Worth of Beyoncé
Multi Platinum Grammy winning artist, an extraordinary successful singer, Beyoncé, is the most powerful female in the entertainment industry. She’s an enigma, an inspiration, and the face of the female empowerment in the world of music. In addition to the killer looks and unmatchable vocals, she also enjoys a net worth of 400 million dollars alongside her husband jay Z.
Net Worth of Jeff Bezos
Jeff Bezos is an American Internet and aerospace entrepreneur media proprietor, and also an investor. He is mostly known as the founder chief executive officer, and president of Amazon, the first centi-billionaire on the Forbes wealth index. This man was also named the richest man in modern history after his net worth increased 150 billion dollars in July 2018 and then 170 billion in September. According to Forbes on 1st April 2020 Bezos’s net worth was 120.4 billion.
Net worth of Elon Musk
Elon Musk’s net worth has grown enormously in the past few years. He’s now about 131.7 billion dollars worth and is the 2nd richest person in the world. He recently passed Bill Gates on the richest billionaires list and the gap between the two entrepreneurs will likely continue to grow. And Gates plans to give away all his money. As Tesla’s stock price keeps rising, it can be said that Musk has passed Gates for good. Musk is so wealthy that when he spends 1.35 million dollars it’s like the average person spending a dollar.
Net worth of Donald Trump
Unquestionably, Donald Trump is the richest person to occupy the White House, yet to get an exact figure on his net worth? It’s a tricky task. Part of the challenge is that The Trump Corporation, the sprawling business he still owns, is a private enterprise and it’s not expected to report financial statements like it would be a publicly traded firm. While it was reported by NBC in 2015 that Trump said he was worth more than $10 billion in a press release, that is widely seen as more bravado than fact. Estimates from different outside sources place the net wealth of the former president, although still considerable, at a much lower value. Probably the most quoted valuation comes from Forbes, who valued the president’s net worth at $2.1 billion in April 2020.
Net worth of Taylor Swift
Taylor Swift is an American, Grammy winning singer and songwriter. Her music has been sold more than 50 million albums including 37 million in the US. Swift is one of the world’s best selling music artists and highest earning female musicians of the 2010. Her net worth is 400 million dollars and she earns roughly 150 million dollar per year. She also has a Beverly Hills house worth 2.85 million dollars.
Conclusion
Net worth is your net assets. While calculation net worth, it calculates assets minus liabilities. It increases when you become older.
The best way to increase your wealth is to increase your assets. Invest your money in appreciating assets. Also, you can take several steps to increase your net worth.
If you want to grow rich and achieve financial freedom, focus on increasing your net worth.
