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You’ve probably heard the term “net worth” floating around, but what does it actually mean? Your net worth is a calculation of your assets (property, savings, investments, etc.) minus your liabilities (debts and other obligations).
Knowing your net worth is beneficial, as it gives you a snapshot of your overall financial health. You can use this information to make informed decisions about your future. Ready to learn more about calculating net worth? If so, just keep reading.
What Does Net Worth Mean?
In order to determine the net worth of a person or company, it is important to understand exactly what net worth means. Net worth is calculated by taking the total assets of an entity and subtracting the total liabilities.
This number measures what an individual owns minus what he/she owes. A positive result is a net worth greater than zero. It indicates that an individual or company is financially solvent.
For example, you may calculate the net worth of a business by adding up the values of all its assets, then subtracting liabilities like loans and outstanding bills. If the resulting value is positive, it means that your company’s total assets exceed the combined value of its debts.
Calculating the net worth of a business is similar to the process used to calculate an individual’s net worth. In either case, you must first determine how many total assets are available to pay off debts.
This will be the sum of all savings, plus investments and properties that can be quickly liquidated or turned into cash. If a company has more assets than debts, the result is a positive net worth.
The Importance of Net Worth
Net worth is a good way to track whether an individual or company is heading in the right direction financially. It’s used along with other measurements of financial health to determine how well an entity can weather future economic storms.
Calculating net worth also shows what steps an entity may need to take in order to meet future debt obligations. As with most measurements of financial health, net worth is also very subjective and its accuracy largely depends on the source providing the figures.
How to Calculate Net Worth
Net worth is also sometimes referred to as net value, shareholder’s equity, or book value. The formula for calculating an individual’s net worth is:
Net Worth = Total Assets – Total Liabilities
The formula for calculating the net worth of a company is:
Company Net Worth = Shareholder’s Equity + Total Assets – Liabilities to pay off debt.
To take the next step in planning your financial future, check out this financial planning guide.
Calculating Net Worth: Secure Your Financial Future
Calculating net worth is an essential step in understanding your financial security and taking steps to maintain or improve it. Hopefully, this article has helped you get a better idea of where you stand financially and gives you the information needed to start building wealth for the future.
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