In finances, you will come across many terms that have their distinct meanings and importance. One of them is Net Worth. In this highly competitive world, it is extremely crucial to consider the net worth of a person or a business to determine their success level.
Generally, the greater the net worth, the more will be the success ratio. While this term is used so commonly, many people are still not aware of its exact meaning as well as its importance.
In this guide, I have explained what is net worth alongside the tactics to measure it properly. In this way, you can expand your knowledge base.
What is Net Worth?
A net worth is a calculation of assets a person or a company possesses after subtracting all of its expenses and liabilities. According to the Investopedia, the greater the amount one possesses, the higher will be the net worth and more will be the successful a person is. As I mentioned, you can utilize the potential of this factor to understand how successful an organization or an individual is.
1. Liabilities
Shortly above, I have used the term “Liabilities.” It is used to refer to the assets or money that is not owned by a company or an individual. Instead, it is owed by someone to carry out different activities.
Different Forms of Liabilities
Liabilities can be in different forms. I have explained some of the top ones in the under section so you can have a better understanding of them.
- Accounts Payable: It is the amount of dues that are still not paid to vendors after getting the products or services.
- Long Term Debts: The liabilities which are not paid even after 12 months are called long term debts.
- Deferred Revenue: It is the amount that has been paid by the customers for the goods or services. However, they have not yet received them.
- Lease Obligations: Lease obligations include the amount that a lessee has to pay to the real owner for using the property or other assets.
- Income Taxes Payable: It is the amount of tax that an organization or an individual has to pay on total income earned over the year.
2. Assets
Another term used while describing the definition of net worth is the asset. It can be anything possessed by a person or a company and can be traded.
Forms of Assets
The following are the key forms of assets that can be owned by a company or a human. It helps in determining the overall net worth.
- Cash: The money a person or a company possesses whether physically or in bank accounts is the most important form of assets.
- Inventory: These are the products or services that a company possesses and can be sold to potential customers.
- Accounts Receivable: It refers to the amount owed by the customers. Further, marketing securities like bonds, stocks, and others are counted in this asset.
- Building and Lands: These are other essential type of assets that play a greater role in enhancing the overall net worth of a company or a person.
- Vehicles: A car, bike, or any other sort of vehicle is also considered a solid asset to be included while calculating the overall net worth.
- Investments: It is the amount that is invested into some other companies or projects and is supposed to generate revenue.
How to Measure or Calculate Net Worth?
It is not difficult to calculate the net worth. A simple formula or equation is pretty useful in this regard, as mentioned below:
Net Worth = Total Assets – Total Liabilities
You have to calculate the overall worth of all the assets you possess. Similarly, calculate all the liabilities and put these sums in this equation to have your hands on the total net worth.
For Example:
Let’s understand this with the help of an easy example. Mark Zuckerberg, one of the most popular names in the world of social media, rose to fame after developing Facebook. Mark Zuckerberg net worth in 2024 is $199.4 Billion. He took the risk of launching this social site during his college and achieved enormous success.
Top Business Personalities Net Worth
- Elon Musk Net Worth: $426.0 Billion
- Jeff Bezos Net Worth: $248.1 Billion
- Larry Ellison Net Worth: $231.1 Billion
- Mark Zuckerberg Net Worth: $219.9 Billion
- Frederic Arnault & family Net Worth: $195.2 Billion
- Larry Page Net Worth: $162.9 Billion
- Warren Buffett Net Worth: $143.4 Billion
- Bill Gates Net Worth: $107.6 Billion
- Carlos Slim Net Worth: $77.7 Billion
Net Worth of Popular Athletes
- LeBron James Net Worth: $1.2 Billion
- Lionel Messi Net Worth: $850 Million
- Cristiano Ronaldo Net Worth: $800 Million
- Floyd Mayweather Net Worth: $400 Million
- Kevin Durant Net Worth: $300 Million
Net Worth of Famous Acting Stars
- Jennifer Lawrence Net Worth: $160 Million
- Christian Bale Net Worth: $120 Million
- Tim Allen Net Worth: $100 Million
- Natalie Portman Net Worth: $90 Million
- Claire Olivia Newman Net Worth: $80 Million
Types of Net Worth
There are two main types of net worth that can help you understand the progress of your company or personal brand.
- Positive Net Worth: If your total assets are worth more than the liabilities, your net worth is said to be positive. The example depicted above is positive net worth.
- Negative Net Worth: If the total liabilities are more than the assets worth, the overall net worth is negative. A higher negative net worth may even lead to bankruptcy.
Importance of Net Worth
Net worth is an important factor as it indicates the success level or failure of a company or an individual. Moreover, it can help determine several other financial factors. I have explained them in the following section.
Progress or Deterioration
If your total net worth increases over a specific period of time, it refers to the progress of your company or personal finances. On the other hand, a decline will indicate that something is off in your finance strategies.
Increase in Net Worth = Current Net Worth – Previous Net Worth (Positive Value)
Income
Next, you can count your current total income with the help of net worth. The increase in net worth, alongside the money you have spared for living expenses, collectively gives you the value of your income.
Income = Net Worth Increase + Current Expenses
Unknown Funds
Businesses always struggle when it comes to calculating funds from unknown sources. However, net worth can play a part in helping you get these figures. The equation used in this regard is:
Unknown Funds = Income – Funds from Known Sources
Final Thoughts
That’s all about what net worth is, alongside its importance and the process of calculating it. You should understand this factor as it can help you greatly in the finance world. You can not only determine your progress level but also calculate expenses from unknown sources. As a result, you can have a precise overview of your overall success.
It is necessary to improve your net worth and follow the tactics that can bring significant revenue. Make sure your liabilities are always less than your total assets. Otherwise, there will be a significant risk of bankruptcy.
FAQs
Why is net worth an important measure?
Net worth is an indication of a person’s or company’s overall wealth and financial situation.
How is net worth measured?
When you subtract the liabilities from the value of the total assets, it gives you the total net worth.
What is the definition of net worth?
Net worth is the total value of all the assets you are currently owning after subtracting all the liabilities or due amounts.
What is the difference between net worth and net wealth?
Net worth is the calculation of assets you currently possess. On the other hand, net wealth also counts the future income and assets.
