Net worth is a measure of the financial value of a person, company, or entity and is calculated by subtracting total liabilities from total assets. It serves as a key indicator of financial health, offering a clear snapshot of an individual’s or organisation's economic standing. If the assets exceed liabilities, it reflects a positive net worth, while a higher level of liabilities results in a negative net worth.
Net worth is the value obtained by subtracting what you owe from what you own. Assets that contribute to net worth include items such as houses, cars, various bank accounts, money market accounts, stocks, and bonds. Liabilities encompass debts and financial obligations, such as loans, mortgages, and bills, which decrease your net worth.
This article explores the concept of net worth, beginning with a clear definition and providing an example to illustrate it. We will walk you through the steps to calculate net worth for individuals and businesses, emphasising its significance in financial planning. Furthermore, we will clarify what negative net worth entails and present strategies to boost your net worth, especially through investing in mutual funds.
What is net worth?
Your net worth is calculated by adding up all your assets and then subtracting your liabilities. This gives you a big-picture view of your financial situation. A positive net worth means your assets outweigh your liabilities, which is a good sign for your financial health. On the other hand, a negative net worth means you owe more than your assets are worth. As of April 2024, Bernard Arnault, the chairman of LVMH, a French luxury fashion and cosmetics company, and his family have the highest net worth in the world at $233 billion. In the business world, Microsoft holds the title of the world's largest company by market capitalisation, with a value of $3.13 trillion.
Example of net worth
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.
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
What is good net worth?
A good net worth depends on several factors like age, lifestyle, and financial aspirations. For someone in their 20s or 30s, starting with a positive net worth is a great sign. In India, for instance, a person in their 30s might aim for a net worth between Rs. 10 lakh to Rs. 20 lakh, primarily through savings, investments, and perhaps property ownership.
As one progresses in life, net worth expectations tend to grow. By the time someone is in their 40s or 50s, a solid net worth might range from Rs. 50 lakh to Rs. 1 crore, depending on factors like income, debt, and investments in assets like real estate or stocks. This could involve having a fully paid-off home, investments in mutual funds, and minimal debt.
By retirement age, typically between 60 to 65 years, financial advisors recommend having a net worth that’s six to ten times your annual income. For example, if someone earns Rs. 10 lakh annually, a good net worth would be around Rs. 60 lakh to Rs. 1 crore. This provides financial stability, covering debts and ensuring a comfortable post-retirement lifestyle. Ultimately, a good net worth reflects one’s ability to manage assets and liabilities effectively over time.
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.
What is the net worth of an individual?
Net worth is the total value of an individual's assets minus their liabilities. Assets include items like cash, investments, real estate, and personal property. Liabilities encompass debts such as mortgages, loans, and credit card balances. Net worth provides a snapshot of financial health, indicating the amount by which assets exceed liabilities. It is a key measure used to assess an individual's financial stability and progress over time. A positive net worth signifies more assets than debts, while a negative net worth indicates more liabilities than assets.
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 use your net worth?
Knowing your net worth is a powerful financial tool that provides insights into your financial health. It helps you assess where you stand financially by comparing your assets and liabilities. Once you've calculated your net worth, you can use this information to make informed decisions about your spending, saving, and investing habits.
First, use your net worth as a benchmark to set realistic financial goals. Whether you’re aiming to pay off debt, save for retirement, or invest in property, knowing your current financial position helps you plan your next steps. For instance, if you have a net worth of Rs. 20 lakh but a goal of Rs. 1 crore by retirement, you can adjust your savings and investment strategies accordingly.
Second, your net worth can help you identify financial weaknesses. If your liabilities, such as loans or credit card debt, outweigh your assets, it’s a clear sign that you need to focus on debt reduction. Prioritising debt repayment can gradually improve your net worth over time.
Finally, use your net worth to track your financial progress. Regularly calculating it can show whether you’re moving closer to your financial goals or if you need to make adjustments. A growing net worth means you’re on the right track toward financial security.
How can you increase your net worth?
Increasing your net worth involves boosting your assets while reducing your liabilities. Whether you’re aiming to improve personal finances or the financial health of a company, strategic planning and consistent efforts can help you grow your net worth.
One of the most effective ways to increase your net worth is by investing. Building a diversified investment portfolio, which may include stocks, bonds, real estate, and mutual funds, can generate long-term wealth. For instance, investing in equity markets or real estate can appreciate over time, adding to your assets. Compounding interest on savings and investments also amplifies wealth growth over time.
In addition to increasing income through investments, focus on building multiple income streams. This could mean taking on a side business, seeking career advancement, or investing in passive income opportunities. Higher income allows you to save more and invest in wealth-generating assets. By maintaining a disciplined approach to debt management, investment, and spending, you can steadily increase your net worth over time, moving closer to achieving your long-term financial goals. Regularly tracking progress will help you stay on course.
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.
