The term 'Net Worth' is included in the Accounting edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Net worth is a figure that represents a business, an individual, or another group’s difference between the assets that they have and the liabilities that they owe. Figuring up this net worth is done by first taking all of the entity’s debts and obligations and then subtracting that number from the entire sum of assets. If the total of all of these assets is greater than the sum of all of the debts and obligations, then a positive net worth results. Otherwise, when the debts are greater than the assets, then the entity has a negative net worth.
When you sit down to determine the net worth figure, every asset should be totaled in the operation. There are many different kinds of assets. These are comprised of cash in the bank, holdings of stocks, real estate, bonds, and other types of investments, and major possessions like vehicles. Correctly figuring out the different assets’ values is done with the use of the up to date fair market value, not the cost paid for the item when it is purchased.
You must also correctly add up the total of debts and obligations when you are attempting to get a correct net worth value. Liabilities cover many different obligations, like a car payment, mortgage, total of credit card debt outstanding, and any other forms of loans that have balances left on them. Both every asset and liability must be measured in order to come up with an accurate net worth.
Knowing your present net worth is very useful and meaningful. If you are able to cover all of your outstanding debt obligations simply by selling of all of your assets, then you have a financial condition that is fairly stable and in order. If your assets are more than sufficient to cover all of your obligations, then your finances are in greater shape. Most businesses and people seek to reach a point that they have actual positive net worth.
There are a few benefits from having a correct understanding of your net worth. It is essential that your present assets’ value is greater than your present debt load. A person who owes more money than they actually own presents a profile of a person who is not an especially good credit risk. Without a positive net worth, many lending institutions like banks will think twice about providing you with the most advantageous loan rates offered. This is because they feel that you present more of a risk to lend money.
It is also good to know where your net worth stands because it is a helpful beginning point for your general financial planning. Should you discover that you hardly have sufficient assets with which to cover your present amount of debts, then this is a good sign that you should not engage in any other purchases until later, after you have eliminated several of your debts. This means that if you occasionally figure up your net worth, then you will comprehend not only where you stand now, but also when you will be in a better position to purchase a new car.