What is Net Worth and how do I calculate it?

On its face, figuring out your financial position seems like an easy task. Some people just take a look at their various accounts and go from there – If you have a good chunk of money in the bank, it means you’re doing OK… right? Well, it’s not always that simple. Many people tend to overlook the various loans and overdrafts that need paying and, over time, these liabilities can creep upon us. If you really want to judge how things are going, you need to factor in all of these elements rather than just focusing on the cash on hand. After you’re done, perhaps you’ll find that your finances are not nearly as stable as they once seemed, but don’t panic! There are a lot of assets that also go unnoticed which can help tip the scales in the other direction. Working all of this out will give you your Net Worth. But what does that mean exactly? And how important is it anyway? What is Net Worth and how do I calculate it?

A persons Net Worth is simply the sum of all your assets (the things you own) minus your liabilities (all the things you owe). By working out this equation, individuals and businesses are able to get a broad understanding of their current financial standing.

These calculations can be surprisingly tricky to work out as there are many components on both sides that are frequently overlooked. Additionally, incorrectly determining the market value of assets can give an inaccurate reading of your net worth.

Depending on the outcome of your calculations, your net worth will be either positive or negative.

Positive vs Negative Net Worth

If the total value of your assets exceeds the total cost of your liabilities, congratulations! Your net worth is positive!

Positive net worth is normally a good indicator that your financial situation is on the right track, although ideally, it should also increase from year to year. Positive and increasing net worth is a great goal to have for both individuals and businesses – but don’t become complacent. Having a net worth of R1 isn’t exactly great just because it’s positive and you should always be striving for a larger margin.

By contrast, a negative net worth occurs when your liabilities outpace your assets. It’s never a desirable position to be in but it should be noted that it’s not all that uncommon. College students and people taking their first few steps of independence are almost expected to have a negative net worth. That said, a negative and/or decreasing net worth can signal that change is needed with regard to your spending and the paying off of debts.

What is an Example of Net Worth?

Let’s look at an example of net worth to make sure we really understand it (just keep in mind that this is an extremely simplified example and actually calculating your net worth will normally involve far more complex calculations).

• Sally owns a property valued at R2 million, a car valued at R100 000 and jewellery valued at R20 000. This gives her a total of R2 120 000 when calculating her assets.*
• She also has student loans of R30 000, an outstanding home mortgage balance of R1.2 million and an outstanding car loan balance of R20 000. This puts her liability total at R1 250 000.
• By subtracting her asset total from her liability total, Sally realises that she has a positive net worth of R870 000.
• Assuming that last year, her net worth was sitting at R650 000, this means that Sally has a positive and increasing net worth.

*It’s important to remember that the validity of these figures will impact the validity of your net worth calculations. In other words, overvaluing your property will give you an inflated total asset figure which may trick you into thinking that your net worth is healthier than it actually is. It may be more beneficial to be conservative with your estimates to ensure that you get a more grounded result.

How do I Calculate my Net Worth?

As noted, your net worth is simply calculated by subtracting your total liabilities (the things you owe) from your total assets (the things you own). The calculation itself is normally pretty straightforward, but the difficulty arises in trying to identify all your various assets and liabilities while accurately appraising the former.

Obviously, everyone has different assets and liabilities and, as such, it is impossible to give you a personalized walkthrough for working out your own net worth. That said, there are some helpful tips that apply regardless of your specific situation –

• Make a list of all of your assets – The most common mistakes that occur when trying to figure out your net worth normally result from rough calculations. Don’t try and make a list in your head while rounding up to the nearest zero. You’ll forget about key assets and your total will be way off the mark.
• Appraise accurately – Be careful not to overvalue your assets when you’re making your list. If, for example, you estimate your home to be far more valuable than it actually is, your subsequent calculations are all going to be skewed.
• List your liabilities – Once again, don’t rely on guesswork when it comes to your totals. Put in the extra effort and ensure that you have an accurate total when you’re working out how much money you owe. This may involve contacting your lenders to verify certain figures.
• Do the math – If you’ve ended up with accurate figures, simply subtract your total liabilities from your total assets. It may be worthwhile repeating this process a couple times to ensure that you haven’t made any mistakes.
• Try online – If you’re not a fan of arithmetic, there are many resources online that can help you work out your totals. Search around for a while and you’re sure to find some net worth calculators.

Is Net Worth Real Money?

It depends on what you mean by ‘real money’. Your net worth is just a representation of how much money you would have if you sold everything you own and then paid off all of your debts.

In other words, if you do the calculations and learn that you have a positive net worth of R650 000, that is definitely real money that you own, but it’s not sitting in the bank waiting to be withdrawn – more likely, it’s tied up in your property or your vehicle. In this example, you could have R650 000 in your pocket ready to spend, but you’d probably have to sell your house and car to get it.

In Conclusion – What does Net Worth Mean and How do you Work it out?

Your net worth is the result of a calculation that gives you a general idea of your financial health. To calculate It, simply add up the value of all of your assets (all the things you own) and then add up the cost of all of your liabilities (all the things you owe). Once you have these two totals, subtract your total liabilities from your total asset value and the resulting number will be your net worth.

Your net worth has two main traits which both need to be considered. Firstly, it will either be positive or negative. If your assets amount to more money than your liabilities, your net worth is positive – this is the desired outcome.

On the other hand, if your liabilities amass, total higher than your assets, your net worth is negative. This is not an ideal situation but it should be noted that many individuals will be in this scenario at some point in their lives.

Secondly, your net worth will either be increasing or decreasing. You can figure this out by comparing your result from this year with those from previous years. Increasing net worth is always a good sign while a decreasing total may suggest that changes need to be made. It is also important to remember that your asset evaluations will need to be accurate to give you a valid net worth result. If you overvalue your assets or forget to add in certain liabilities, you may end up with a number that doesn’t truly represent reality.

It may be worth your while to create a physical list of all your assets and liabilities when calculating your net worth to ensure that nothing gets left out or misrepresented. If you’re having trouble figuring everything out, there are also many net worth calculators online which can provide assistance.

Disclaimer Finance101: All of our posts are for research purposes only. Finance 101 aims to assist its readers with useful information on the laws of our country that can guide you to make financial decisions that will enable you to become more financially independent in the future. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law & finance related queries. Should you require specific legal/financial advice we advise you to get in touch with a qualified financial expert.

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