Net Worth

Net Worth is a good indicator of your financial health. Net worth represents assets minus liabilities. In simpler terms, it's what you own minus what you owe.
Net Worth
3 min
04-June-2024

Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company's health, providing a useful snapshot of its current financial position.

Have you ever wondered how celebrities and industrialists measure their vast wealth? Beyond the glitz and glamour, net worth is a core financial metric that spells out their economic status.

This figure is not just for the rich and famous; it is a crucial measure for anyone looking to understand their financial health comprehensively.

What is net worth?

  • Your net worth is the net value of all your assets. It presents a holistic picture of financial health by subtracting your liabilities from your assets.
  • Your net worth is a big-picture snapshot of your financial health. Here’s how to track it. Your net worth is the net value of your assets. You calculate it by subtracting your liabilities from your assets.
  • If the assets of the company or individual are more than the liabilities then it means a healthy positive net worth. However, if the liabilities exceed the assets, it is a negative net worth.
  • As of April 2024, Bernard Arnault - chairman of LVMH, a French luxury fashion and cosmetics company and his family have the highest net worth in the world, with $233 billion.
  • While speaking of companies, Microsoft is the world's largest company by market cap, with a value of $3.13 trillion.

Example of net worth

Let us understand net worth with the help of an example.

Consider a person A. He owns an apartment whose market value today is Rs. 2,20,00,000. He has made investments in Mutual Funds, FDs, stocks, and bonds amounting to Rs. 50,00,000. He also has Rs. 10,00,000 in his savings account. All of these are his assets.

Now, let us look at his liabilities. He owes Rs. 1,50,00,000 to the bank for his home loan and has debts amounting to Rs. 20,00,000.

The net worth of person A will be calculated as follows:

Net Worth = Assets – Liabilities

= Assets (Rs. 2,20,00,000 + Rs. 50,00,000 + Rs. 10,00,000) - Liabilities (Rs. 1,50,00,000 + Rs. 20,00,000)

Net worth = Rs. 1,10,00,000

How to calculate net worth?

Calculating net worth is quite simple by using the above formula. The most important part is understanding how to classify assets and liabilities.

Step 1: Calculating your assets

  • Take into account all your cash deposited in bank accounts, physical cash, and cash equivalents like money market instruments.
  • Consider all your investments in the form of stocks, bonds, and mutual funds.
  • Estimate the value of any real estate you own at its current market price.
  • Valuable personal belongings like art, jewellery, and vehicles also need to be considered while calculating assets.
  • Also, take into account the balance of your provident funds, insurance policies.

Personal belongings in the form of clothing and furniture are excluded since they cannot be sold during liquidation or bankruptcy.

This comprehensive listing will provide the total value of what you own.

Step 2: Calculating your liabilities

  • Include all your loans like home loans, car or education loans and personal loans if any. Also list the remaining balance on your home or car loan.
  • Credit card debts need to be taken into consideration for the calculation of liabilities.
  • Include the monetary value of any obligations you have, like medical bills or personal debts.

The summation of all the above will give you a picture of your liabilities.

Step 3: Subtract liabilities from assets

Now, just subtract all the liabilities from your assets and the resulting number is your net worth and is used to assess the financial health of individuals as well as organisations.

  • If your assets exceed your liabilities it means you own more than you owe, which gives you a positive net worth. You will still have money to spare after meeting all your obligations and liabilities.
  • If, after subtracting all liabilities, the value of your assets becomes zero, then you have a zero net worth, which means you have just enough assets to meet your liabilities and nothing more.
  • But if subtracting all your liabilities from the summation of your assets leaves you with a negative number, you have a negative net worth. This means your finances are in the red, and you owe more than you own.

What is net worth for a business?

The net worth of a business is the value by which the assets of the business exceed its liabilities.

Furthermore, the net worth of a business is a good indicator of its health and stability.

Consider a company with the following financials:

  • Total assets: Rs. 50,00,000 (including cash, inventory, property, etc.)
  • Total liabilities: Rs. 30,00,000 (including loans, accounts payable, etc.)

Net worth of a business = Assets of the business - Liabilities of the business

Net worth=Rs. 50,00,000−Rs. 30,00,000=Rs. 20,00,000

The business has a net worth of Rs. 20,00,000, indicating it owns more than it owes.

Why is net worth important?

Net worth is an important indicator, especially in personal finance, because:

  • It is an indication of your financial growth, stability and security
  • It helps you plan for the future and gives you a realistic picture about how to go about planning for major purchases
  • It affects your creditworthiness and your ability to secure loans and financing
  • For businesses, net worth impacts their borrowing capacity, investment potential, and the confidence of stakeholders.

What is negative net worth?

Net worth is simply the difference between your assets and liabilities. If your liabilities exceed your assets, it means you owe more money than you own. This results in a negative net worth.

How to increase your net worth with mutual funds?

Mutual funds have become a widely popular mode of investment to grow wealth over the long term in India. The AUM of the Indian MF Industry has grown from Rs. 8.25 trillion as of March 31, 2014, to Rs. 53.40 trillion as of March 31, 2024—more than 6-fold increase in 10 years.

Investing a consistent amount of money over a long period allows you to take advantage of compounding and rupee cost averaging.

Thus, regular and strategic investments in mutual funds can contribute to an increase in your net worth.

Conclusion

Net worth depends on just two factors: assets and liabilities. Increasing the former and reducing the latter is how you increase your net worth.

One effective way to increase assets is through investing in mutual funds, as they offer diversification, professional management and liquidity.

Platforms like the Bajaj Finserv Mutual Fund Platform can help you reach your financial goals in your investment journey. It offers lump sum calculators and SIP calculators to ensure you can estimate your returns and plan investments accordingly.

The convenient and easy-to-use Bajaj Finserv Platform boasts over 1,000 mutual funds schemes. It also allows for easy mutual fund comparison and selection, making it an excellent resource to build positive net worth in the long term.

Calculate your expected investment returns with the help of our investment calculators

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Frequently asked questions

What do you mean by net worth?
Net worth effectively reflects your financial well-being. It is calculated by subtracting your liabilities from your assets. Essentially, it represents the amount remaining once all your debts are settled.
What Is a Good Net Worth?
Determining what constitutes a "good" net worth can be somewhat subjective and varies greatly depending on age, life stage, financial goals, and geographic location. But if you are able to meet or exceed your financial obligations, you can be considered having a good net worth
How do you calculate your net worth?
To calculate your net worth, subtract your total liabilities (debts) from your total assets (what you own, including cash, investments, and property). This figure represents your financial standing.
What is the meaning of net value?
The term "net value" generally refers to the value of an entity, asset, or transaction after accounting for all relevant costs, liabilities, or deductions.
What is net worth example?
You might have assets like a car, a home, or savings in the bank, which can add up to a significant sum. However, to accurately assess your holdings, you must also consider your debts. Your personal net worth is the result of combining these assets with your liabilities.
What is net worth of a company?
The shareholders' equity, or net worth, of a company is determined by subtracting its total liabilities (what the company owes) from its total assets (what the company owns). As your company performs better, both your net worth and profits tend to increase.
How Often Should I Calculate My Net Worth?
While there is no set rule on frequency, you should calculate your net worth annually for consistent financial tracking and after any major life events or significant economic changes that could impact your financial status.
What Does Liquid Net Worth Mean?
Liquid net worth represents the part of your net worth that can be quickly turned into cash, often within a day. This contrasts with assets like jewellery or property, which may require more time to convert into cash.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.