We have all heard the term ‘net worth’ thrown around in many different instances. Usually, we encounter discussions of net worth when we are discussing the worth of celebrities or trying to understand news articles that constantly tell us how much money Billionaires are worth. However, if you were to ask your average person what net worth really is, they may not be able to explain it. There is no wonder why, as the net worth isn’t necessarily talked about in education or even brought up to people who make an average salary. Some people think they may know what net worth is, and if you are one of these people you may be surprised to learn that you’re not getting the full picture of what net worth is.
Many people believe that net worth is determined purely by the amount of money that someone has in their account. This is in fact a very common misconception and working out your net worth is a little more complicated than that.
What is net worth?
To put it plainly, your net worth is essentially the total value of all of your assets, minus any liabilities that you may have. This includes the worth of any property that you may have, such as your home or a business that you may own. You add this total to whatever amount that you have in your bank account.
However, simply adding together all of your equity does not equate to your net worth and is not an accurate representation of all that you own. It is fair to assume that you have some sort of financial liabilities in your life, such as a mortgage or a car loan. These can not be forgotten when you are trying to work out your net worth, so you need to deduct your outgoing to get an accurate representation of what you are really worth. If that is confusing to you, then an easy way to work it out would be figuring out how much money you would have in your bank account if you sold all of your possessions and took away any outgoing costs that you have.
Positive and negative net worth
Though you may not have heard of it before, as well as having a positive net worth, you can also have a negative net worth. This happens when your liabilities outweigh the value of your assets and can often appear when you have a lot of your property bought via finance. Though a negative net worth may seem scary, it is actually an extremely common occurrence. This is especially the case if you are a student or you have just left college and you are still paying off your student debts. Usually, when people first leave education or become a member of the working world, they have a negative net worth. This is because at that point people usually have more debt than property, but this can be changed within a number of years.
Is it important to know your net worth?
More likely than not, you won’t really ever need to know what your net worth is. However, in a time where we have a lot of outgoing and incoming costs, it can be difficult to keep track of how much money we really have. After all, with modern bills such as phone bills and continuous subscriptions, it can all add up without you knowing. When this happens, we can be led to believe that we have more money than we really have and so it is best to know our true worth so that we can comfortably have control of our finances.
Different types of net worth
As there are vast differences in the wealth system, it is understandable that there are different ways to measure net worth. Aside from the basics of positive and negative net worth, there is also ultra-high and high net worth. But you may be wondering, what’s the difference between ultra high net worth and high net worth?
As you can probably tell by the name, there is quite a big difference between those with a high net worth and those with an ultra-high net worth. People with high net worth have between one million dollars and ten million dollars, which is a substantial amount of equity. However, people who are considered as ultra net worth usually have over ten million dollars.
How can you improve your net worth?
The best way to improve your net worth is by getting rid of any loans or financial obligations that you have, once you have completely eliminated the costs that you have then you will start to gain a positive net worth. There is no point in trying to increase the property you own if you still owe money to others.