What Does Personal Net Worth Mean?
When it comes to talking about personal finances very few topics are brought up more than net worth. Often net worth is brought up for a variety of important personal finance decisions such as retirement planning, estate planning, and as an indicator of whether a person is a millionaire or billionaire. It’s also brought up to compare with the “Joneses.”
You might have heard the technical term for net worth which is assets minus liabilities.
But, what exactly is an asset and what are liabilities?
In this post, you’re going to dive in to figure out what does personal net worth mean? We are also going to talk about what net worth isn’t and help you learn how to calculate your net worth. We're also going to use our new found knowledge to compare and contrast the differences between millionaire and billionaire.
+ Table of Content
- Definition of Net Worth
- How to Calculate Your Net Worth
- Example 1- Calculating your Net Worth (positive net worth)
- Example 2- Calculating a Negative Net Worth
- What Net Worth is Not
- Am I a Millionaire
- What is a Millionaire?
- Example 3- Calculate Millionaire Status
- What is a Multi-millionaire
- Example 4- Calculate Multi-millionaire Status
- What a Millionaire is Not
- What is a Billionaire
- Example 5- Calculating Billionaire Status
- What is a Multi-billionaire
- What a Billionaire is Not
- Some Things to Keep in Mind About Net Worth
- Quick Definitions
Definition of Net Worth
As stated above, net worth is assets minus liabilities (or assets-liabilities = net worth). In this equation, assets are everything you own with monetary value.
Liabilities are the sum of everything you owe to people. Another way to look at liabilities is all the debts you owe.
Merely put net worth equals everything you own minus all your debts.
How to Calculate Your Net Worth
To be honest in principle the concept of calculating net worth might not be hard. Gathering the information is probably the most challenging part.
Step 1. List all assets and value
Estimate the value of all your assets with monetary value. This includes retirement accounts, and non-retirement checking and savings account. Also consider any stock, CD, bond or other investments/securities you might be holding.
The inclusion of a house or personal car to this list has differing opinions. One of the reasons for the debate is that from a personal finance perspective the value of those assets is hard to get to if needed. In most situations you must have a home to live in and a means of transportation.
Another way to look at it is if you get into hard times and need money if you sell your car and home where are you going to live and what’s going to be your mode to get around.
The exception would be vacation homes or rental property, multiple cars or classic/vintage/collector cars.
Don’t forget to add other appraised collectibles such as expensive jewelry, precious metals, antiques, and so forth.
Step 2. List all your debts (liabilities)
Add up all the debts you have including mortgages (especially if you counted the home in the asset column), loans (student loans, auto, and so on). Make sure to include borrowed money from friends and family.
(Borrowed money from friends and relatives still counts as debt although the tendency is to look at it differently.)
Step 3. What you own (assets) minus what you owe (debt, liabilities)
Subtract your total assets (step 1) with your total debts (step 2), and your result will be your net worth.
Example 1- Calculating your Net Worth (Positive Net Worth)
Sarah has $100,000 in her 401K. She owns a home worth $200,000, but she has a mortgage of 150,000. She also has $10,000 in student loans and a $5000 emergency fund. What is her net worth?
Based on the above example:
Step 1: List assets
Emergency fund: $5,000
Total assets = $305,000
Step 2: List debts (liabilities):
Student Loans: $10,000
Total debt (liabilities)= $160,000
Step 3: Assets- Liabilities
Sarah’s calculated net worth = $145,000
Example 2- Calculating a Negative Net Worth
To illustrate another point Barry has $10,000 in his 403b. He doesn’t own a home, but he does have $80,000 worth of student loans. His car is worth $10,000 with a car loan balance of $15,000 on it. He has $1000 in savings. What is his net worth?
Step 1: List assets is:
Total assets = $21,000
Step 2: List debts (liabilities):
Student Loans: $80,000
Total debt (liabilities)= $95,000
Step 3: Assets- Liabilities
$21,000- $95,000= $145,000
Barry’s calculated net worth = -$74,000
A couple of points to keep in mind:
First, notice when adding the value of the car on the assets side you need to add the vehicle debt (if any) on the liabilities side.
The second point, it’s possible to have a negative net worth. A negative net worth happens a lot with younger adults recently graduated from college with a sizeable student loan. Net worth in the negative might not be something to panic about, but it’s something to be mindful of.
What Net Worth is Not
We have mentioned above what net worth is. We also discussed how to calculate your net worth and even gave a couple of examples to illustrate calculating your net worth. It’s also important to mention what net worth is not.
1. Net Worth is Not a Way to Keep Up with the Joneses
Net worth is not a way to compare yourself to the Joneses or the Smith’s down the street. Each person/ family has their own unique set of finances and without living as that family and knowing the ins and outs of their financial picture comparison hardly is fair.
Tommy is a seasoned elementary school teacher owns a car worth $15,000 with no car loan. He has $10,000 in the bank.
Tommy’s net worth is equal to $25,000
Johnny graduated from med school with $100,000 of student loans. He has a house worth $150,000 with $30,000 mortgage and a $5,000 car with no car loan
Johnny’s net worth is equal to $25,000 ($155,000-$130,000)
If we wanted we could make other examples where the net worth is equal (or higher), but the financial situation is different. Those two examples show a net worth that is equal, but the details vary considerably. Johnny has debt, but Tommy doesn’t. We haven’t even touched on the differences in future earning potential based on their career from those examples.
2. Net Worth Does not Define You
Let me repeat this, net worth does not define who you are. As shown above, people’s circumstances are different and people’s earning potential is also different. Assuming every other variable being the same, a teacher is unlikely to have the same earning potential as a doctor and thus unlikely to have equal net worth in the short run.
3. Net Worth is Not a Way to Snub People
Your net worth is not a way to belittle other people. If you manage to amass a good size net worth make sure to enjoy some of it, invest some of it, and give some of it away.
Am I a Millionaire?
Applying What We Learned
Below we’re going to learn how to calculate a millionaire and a billionaire.
If someone asks you what is a millionaire would you know? What about what a multi-millionaire is? More importantly, do you know if you’re a millionaire? The word millionaire gets thrown around a lot but what most people think about are world-class athletes or big-time celebrities. Some think about the leaders and executives of the biggest companies in the world.
What most don’t think about is there next-door neighbor, a friend, a relative or even YOU.
What is a Millionaire?
Yes, you heard me , you could be a millionaire and not even know it. What’s a millionaire, you ask? The popular layman’s definition is “a very rich person.” The technical term for a millionaire is someone whose total net worth is at least one million dollars. For simplicity we are going to use dollars, but it could be any currency.
As stated above, you calculate net worth by adding up the monetary value of everything you own and then subtracting all your debts from it (assets minus liabilities). If your total net worth is at least one million dollars after subtracting your debts from assets, you are a millionaire.
Example 3- Calculate Millionaire Status?
Here is a simple example of how to investigate whether you’re a millionaire:
Rental Property: $100,000
Total assets= $1,125,000
Tommy’s Debts (liabilities):
Car Loan: $10,000
Total debts (liabilities)= $110,000
Total Net Worth:
$1,125,000 minus $110,000 equals $1,015,000 => Millionaire
What is a Multi-millionaire?
A multi-millionaire is someone whose net worth is equal to several million dollars.
Example 4- Calculate Multi-millionaire Status
Rental Property: $1,500,000
Total assets= $4,090,000
Tommy’s Debts (liabilities):
Student Loan: $15,000
Car Loan: $2,000
Total debts (liabilities)= $217,000
Total Net Worth:
$4,090,000 minus $217,000 equals $3,873,000
What a Millionaire is Not
As mentioned above, you’re a millionaire or a multi-millionaire based on your net worth.
Your income is not a factor in calculating whether you’re a millionaire or multi-millionaire.
While salary is not a factor in calculating millionaire status, a high income will help you invest and save more. Investing and saving more allows you to increase your assets, which is a factor. It’s possible to have a million-dollar income and yet have a net worth less than a million dollars, especially if the person making the million-dollar salary is not a good saver.
What is a Billionaire?
The billionaire club holds some of the wealthiest individuals and families in the world. Business Insider estimates there are over 1,500 billionaires in the world. The majority of the world's billionaires are in the United States, China, and India. We are going to run through the similar steps above to answer the question what’s a billionaire and what’s a multi-billionaire?
The popular layman’s definition of billionaire is someone who got too rich or can buy whatever they want.
The technical term for a billionaire is someone whose net worth is at least one billion dollars.
As previously discussed you can get a person's net worth by adding up the monetary value of everything they own (assets) and subtract all their debts (liabilities ex. loans) from it; the difference is the persons net worth.
Example 5- Calculating Billionaire Status
Stock Investments= $1,000,0000,000
Property = $1,000,000,000
Total assets = $2,000,000,000
Sarah’s debts (liabilities):
Business loan $500,000,000
Total debts (liabilities) = $500,000,000
Total net worth:
$2,000,000,000 (assets) - $500,000,000 (debts) = 1,500,000,000 billion dollars (or 1.5 billion dollars)
What is a Multi-billionaire?
A multi-billionaire is someone whose net worth is equal to several billion dollars. For example, if we calculated net worth and got a net worth of three billion dollars or four billion dollars or in the case of some of the wealthiest people in the world north of fifty billion dollars, you would be a multi-billionaire.
What a Billionaire is Not
A billionaire is not someone who makes a billion dollars a year. The amount of income a person makes is not used to determine billionaire status. If a person is a good saver/investor an extraordinarily high income could help with accumulating assets and decreasing debt which is a factor in determining whether someone is a billionaire.
Some Things to keep in Mind about Net Worth
Negative Net Worth
As previously mentioned if you calculate your net worth and realize it’s negative many times it’s from obvious sources such as:
School Debt: You might see a negative net worth if you’re a recent nurse graduate from either an undergraduate or a graduate level program and you have a lot of nursing school debt.
Credit Card Debt: Having a lot of credit card debt is another way to see a low or negative net worth.
How do I increase my net worth?
There are three primary ways you can increase your net worth.
Decrease your debt: Lowering or paying off debt such as credit cards or school loans will help increase your net worth (it will decrease your liabilities in the equation assets-liabilities = net worth).
Decrease your spending: If you decrease your spending, it’ll help you free up more disposable income you can use to save and invest. To help you reduce your spending think about getting on a budget to help you see where all your money is going.
Saving more money: Saving more money will help increase your net worth (it’ll increase your assets in the equation, assets-liabilities = net worth).
Investing more: Making a habit out of investing your money will increase your net worth (like the savings column it will increase your assets in the equation assets-liabilities = net worth).
401K: An investment plan typically offered by employers for saving for retirement
403(b): Like 401k, usually hosted by certain-tax exempt employers
Assets: What you own that has a monetary value (ex. car, house)
Billionaire: If your net worth is equal to or higher than one billion dollars
Liabilities: The debts/obligations that you have
Millionaire: If your net worth is equal to or greater than one million dollars
Mortgage: The loan on your house
Net Worth- Calculated based on what you own minus your debt (assets-liabilities)
Have you calculated your net worth recently?
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