Net worth refers to the financial value associated with a person or a corporation. It includes the sum of the value of all the assets but excludes all the debts or liabilities. An individual’s or corporation’s net worth is an indicator of financial health.
How to Calculate Net Worth (With Formula)
According to Finra.org, the formula for finding net worth is:
Net worth = Assets – Liabilities
It is worth noting that you can easily find a corporation’s net worth in the stockholders’ equity section of the company’s balance sheets.
What Are Assets?
The Open University explains that assets refer to resources that a person or corporation owns that have an economic benefit of some kind. You can exchange them for cash or its equivalents.
Generally, these resources include liquid assets such as money in savings accounts, which you can easily access and use immediately. In addition, they include investments like bonds and stocks in retirement accounts such as 401(k)s or IRAs, collectibles, jewelry, and real estate. Also, if your life insurance policy builds a cash value, it may be considered an asset.
What Are Liabilities?
Liabilities refer to the debts you owe other parties, which must be paid back at some point because they are not part of your personal property. They include mortgages, auto loans, credit card balances, personal loans, student loans, etc.
Positive vs. Negative Net Worth
The general rule of thumb is if the value of your assets is greater than your liabilities, your net worth is positive. That indicates good financial health.
On the other hand, if your liabilities are greater than your assets, your net worth will be negative. That indicates you have unhealthy financial habits that you need to get rid of. So, you may need to hire a financial advisor for help.
Net Worth Calculation Example
Suppose you have $2,000 in your emergency funds across two bank accounts, car loans worth $15,000 for two family vehicles, student loans worth $30,000, mutual funds worth $150,000 in your retirement accounts, and credit card balances worth $6,000. Also, suppose that the fair market value of your home is $250,000 but you only have equity worth $125,000.
You can use a net worth calculator to determine your total value financially. However, it would be best to create a balance sheet that lists your assets and liabilities, so you can determine your true financial situation.
You can find the total value of your assets as follows:
Assets = ($2,000 of emergency funds + $150,000 of mutual funds + $125,000 of real estate equity)
And you can find the total value of your liabilities as follows:
Liabilities = ($15,000 of auto loans + $30,000 of student loans + $6,000 of credit card debt + $125,000 of mortgage) = $176,000
Then apply the net worth formula:
Net worth = $277,000 – $176,000 = $101,000
Based on this example, you have a positive net worth of $101,000, which indicates you are financially healthy and on your way to meeting your financial goals.
What Is a Good Net Worth?
A Business Insider report based on Federal Reserve data shows that the average American family has a net worth of $748,800. And yet, according to CBS News, the average American believes they need $1.25 million to retire.
Typically, you need to have at least $1 million of liquid assets (cash and cash equivalents) to be considered a high-net-worth individual, explains the Corporate Finance Institute.
So, while you may have the average net worth, it may not be enough for retirement or to qualify you as a high-net-worth individual. However, where you retire and the cost of living in that area will also determine whether your net worth is good enough to sustain your entire retirement.
Examples of High-Net-Worth Individuals
Per Forbes, here are examples of famous people and their estimated net worth as of January 2023:
- Elon Musk ($146.8 billion)
- Jeff Bezos ($118.5 billion)
- Kim Kardashian ($1.8 billion)
- Rihanna ($1.4 billion)
- Jay Z ($1.3 billion)
- LeBron James ($1 billion)
- FINRA: Know Your Net Worth
- Business Insider: The Average Net Worth in America by Age, Race, Education, and Location
- Corporate Finance Institute: High Net Worth Individual (HNWI)
- CBS News: Here's How Much Americans Think They Need for Retirement
- Forbes: The World's Real-Time Millionaires
- The Open University: 2.3.1 What Are Assets, Capital and Liabilities?
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.