Net Worth Definition & How to Calculate It

ACCOUNTING, ACTIVELYSHARE.COM — Want to know how rich you are? Let’s learn how to calculate net worth!

Net worth is an economic term to describe the value of a person’s property whose status is private, without credit or rent. There are many benefits for knowing what your net worth is, from applying for a loan to reporting taxes. This time, ActivelyShare.com will invite you to know more about what net worth is, its types, formulas, and how to calculate net worth.

What is Net Worth?

Net worth is a term derived from the words “net” which means clean and “worth” means value. Taken together, the net worth is the amount of wealth an individual owns from the total assets after deducting credit and rent.

Assets that are calculated in net worth are not only in the form of money, but include the value of physical tangible assets such as cars, houses, property, land, securities, investments, businesses, and the like.

Regardless of the meaning, net worth is one way to measure your financial health. The net worth value will be positive if the amount of assets owned is greater than the amount of credit or debt. This means that your financial condition is healthy. However, the financial condition is said to be not good when the net worth is negative, where the amount of assets is smaller than the amount of debt.

Types of Net Worth

The types of net worth are divided into two, namely intangible and tangible net worth. The complete explanation of intangible and tangible net worth is as follows.

1. Tangible Net Worth

Tangible net worth is the value of a person’s net worth calculated from all physical tangible assets without involving non-physical assets. Examples of non-physical assets such as patents, copyrights, and the like. Assets that are classified as tangible net worth include assets in the form of receivables, cash, inventory (goods), equipment (machinery), buildings, cars, investments, jewelry and so on.

The calculation of the Tangible Net Worth formula is as follows.

Tangible net worth = Total assets – Liabilities – Intangible assets

2. Intangible Net Worth

Meanwhile, net worth that only calculates the components of non-physical and intangible assets is called intangible net worth. Examples of intangible net worth include exploration and exploitation rights, copyrights, patents, and trademarks.

The calculation of the intangible net worth formula is as follows.

Intangible net worth = Total assets – Liabilities – Tangible assets

Net Worth Components

There are many parts of wealth that can be classified as net worth, and some are not. More details about the components that make up the net worth are as follows.

1. Value of Home / Personal Property

The first component of net worth is the value of your home or personal property. In this case, you are required to calculate the entire value of the house in your ownership, whether it is a residential house, a stopover house, a vacation home, a second home, or a house for investment.

Then, calculate the sale value of each house value that is included in the asset list. Avoid calculating the purchase price of property because of course the price is different every year.

2. Vehicle Value

Next, the net worth component is the value of the vehicle. All privately owned vehicles must be included in the asset register. However, you cannot include office facility vehicles in assets. Because the ownership status is a lease, the ownership of the vehicle remains in the hands of the office.

As long as the value of this vehicle is privately owned, it is mandatory for all vehicles to be included in the asset register. Examples include cars, motorcycles, pedal bikes, box cars, trucks, tricycles, and so on.

3. Total Savings

Third, an important component of net worth is the amount of savings, regardless of type. For example, you participate in a pension insurance program with a contribution payment of IDR 300 thousand per month. You can enter this nominal as a net worth, because when you retire this money will come back to you. However, you can’t include the estimated retirement insurance claim as a net worth, because it’s still uncertain.

4. Investment

Next, the net worth component is investment. If you are financially literate, definitely make an investment, even if it’s a small amount. The value of this investment should be included in the list of net worth calculations.

To calculate the net worth of investment, first add up the total investment amount of your instruments. There is no need to calculate the nominal profit that has not been withdrawn, because the amount is still uncertain.

5. Cash

Cash on hand Cash on hand is the next component of net worth. Of course, not all of your money is stored in accounts or non-physical assets only. You certainly hold some cash either in your wallet or elsewhere. Cash on hand should also be included in the net worth calculation.

6. Undisbursed Guarantee / Insurance

Finally, the net worth component is a guarantee or insurance that has not been disbursed. Usually you enroll in insurance. Well this needs to be included in the list of assets. The meaning of undisbursed insurance is that insurance has not been used and is disbursed in the form of money. Calculation of insurance value by adding up all premiums that have been paid by the insurance service provider.

How To Calculate Net Worth

So that you can better understand the calculation of net worth, here is how to calculate net worth.

1. Add Up All Assets

First, how to calculate net worth is to calculate the entire value of the assets owned. The components of assets that are included in the asset category have been explained in the components that make up the net worth.

2. Calculate the Obligations to be Paid

Next, how to calculate the net worth is to add up all the obligations that must be paid. In this case such as the amount of debt, bills, and the like.

3. Calculating Net Worth with a Formula

After knowing the amount of assets and liabilities that must be paid, you can calculate your total net worth. The way to calculate net worth is to apply it to the formula. The net worth formula is the amount of your assets minus the value of your liabilities. If you have no liabilities, then your net worth is equal to your total assets.

Net Worth Formula

The net worth formula is as follows:

Net Worth = Total Assets – Total Liabilities

Example Of How To Calculate Net Worth

The calculation of net worth using the net worth formula is as follows.

Asset List

1 Residential House
10 gr Jewelry
2 Motorcycle
1 Car
Investment in Mutual Fund
Total Cash Holding
Savings

Total Assets

$800 Million
$5 Million
$23 Million
$109 Million
$5 Million
$4 Million
$56 Million

$1 B 2 Million

List of Obligations

Credit card bills
Bank debt

Total Liabilities

$6 Million
$10 Million

$16 Million

Total net worth or net worth

The net worth formula is:
Net Worth = Total Assets – Total Liabilities
Net Worth = 1 M 2 Million – 16 Million
Net Worth = 986 Million

So your total net worth or net worth is $ 986 million.

That’s the discussion from ActivelyShare.com about the meaning of net worth, its types, components, and how to calculate it! Net worth is one of the benchmarks for living well-being, so take the time to calculate it when you have time.


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