The total assets less the total liabilities by an individual or company
What is Net Worth?
Net worth is the value of a person or company and can be computed by deducting the total liabilities from the total assets that are owned by the individual/company.
Net worth can be computed using the following formula:
Net Worth = Assets – Liabilities
If a person or company owns assets that are greater than liabilities, it is said to show a positive net worth. If the liabilities are greater than assets, it implies a negative net worth. A positive net worth is associated with good financial health, whereas negative net worth can be perceived as a negative signal and shows the inability to settle liabilities.
The concept of net worth can be applied to multiple levels. It can be used for an individual, a group, an organization, a government, or even an entire city or country. For the purpose of simplicity, we will limit our discussion to the net worth of either individuals or organizations.
Summary
- Net worth is the value of a person or company and can be computed by deducting the total liabilities from the total assets that are owned by the individual/company.
- If an individual or company owns assets that are greater than liabilities, it is said to show a positive net worth. If the liabilities are greater than assets, it implies a negative net worth.
- The concept of net worth can be applied to an individual, a group, an organization, a government, or even an entire city or country.
Calculation of Net Worth
The calculation of net worth seems rather simple, but the most important part is how assets and liabilities are computed and what falls under the buckets of assets and liabilities. Below, we will go over the steps to compute the net worth of an individual.
Calculating Assets
Assets include everything that can be given a tangible value. For an individual, it can include their possessions such as house, car, or a piece of art, and also includes their bank accounts, insurance policies, and investments. Personal belongings, such as clothes and furniture, are typically not included as assets, as they are not sold in case of bankruptcy or liquidation.
Calculating Liabilities
Liabilities include any financial obligations that need to be repaid. It can include loans, mortgages, rent, or bills. When calculating liabilities, take the repayments that are currently outstanding – not something that will be due in the near future.
For example, if we are computing the net worth of an individual at the end of the year, and they pay their utility bill each month, we will only take the amount due for that month (say December) and not include subsequent amounts for January or February of next year.
However, in some cases, house rent may be treated differently, as most lease payments are for a year so that an entire year’s payment may be treated as an obligation. Most people would exclude rent from net worth calculations.
Calculating Net Worth
After making a list of the total assets and liabilities, you can simply deduct the liabilities from the assets and arrive at the net worth. It can be repeated once or multiple times a year and can be used to assess the financial health of an individual. The same process applies to organizations.
The Net Worth Method
The net worth method refers to an indirect balance sheet approach to estimate income. It essentially uses an individual’s net worth on two different dates to detect if there is any income derived from unreported or unknown sources. The method is typically used by accountants, especially if there is any litigation related to fraud on concealing reported income and net worth.
The use of the net worth method is demonstrated in the figure below. The first step is to calculate the net worth of the individual at the start and end of the period. In the example, we’ve denoted them as current net worth (NWc) and past net worth (NWp).
It is important to find the opening and closing net worth using the same asset value method (cost, fair market value, etc.). The difference between the net worth is referred to as the net worth increase (NWI). Any non-deductible living expenses are added to the NWI to derive the income value.
After arriving at the income figure, the income or funds that are declared or evident are deducted from the amount. The difference will show you how much income is coming from unknown or undeclared sources.
Another important point to note is that during the process, any part of income that is derived from sources such as gifts or loans should be declared to ensure accurateness and thoroughness of the exercise.
Additional Resources
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
FAQs
The basic formula to calculate your net worth is to add up all of your assets, and then add up all of your liabilities. Once you have those two numbers, subtract your liabilities from your assets. That number is your net worth.
What do I consider for my net worth? ›
To calculate your net worth, you subtract your total liabilities from your total assets. Total assets will include your investments, savings, cash deposits, and any equity that you have in a home, car, or other similar assets. Total liabilities would include any debt, such as student loans and credit card debt.
Can I retire at 55 with $3 million? ›
Most people will be perfectly capable of supporting a $5,000 monthly retirement budget on $3 million, as long as it's adequately liquid and properly diversified.
Is $10 million enough to retire at 60? ›
If you want to spend lavishly in retirement, that's completely possible with $10 million. As mentioned above, even without investment income, you could easily spend $200,000 a year and not worry about your money disappearing before you die.
Does a car count as net worth? ›
Your net worth is what you own minus what you owe. It's the total value of all your assets—including your house, cars, investments and cash—minus your liabilities (things like credit card debt, student loans, and what you still owe on your mortgage).
Does your house count as net worth? ›
At its most basic, net worth is everything you own minus everything you owe. To calculate your net worth, tally the value of all or your assets, including bank accounts, investments, and perhaps the value of your home or vacation home.
What is good net worth by age? ›
Average net worth by age
| Age by decade | Average net worth | Median net worth |
|---|
| 40s | $713,796 | $126,881 |
| 50s | $1,310,775 | $292,085 |
| 60s | $1,634,724 | $454,489 |
| 70s | $1,588,886 | $378,018 |
4 more rowsIn the United States, the concept of being rich is often a subject of discussion, curiosity and, sometimes, aspiration. Charles Schwab's 2023 Modern Wealth Survey provides insights into this topic, revealing that the average American equates being wealthy with a net worth of approximately $2.2 million.
Does a 401k count as net worth? ›
Yes. The value of your 401(k) account is a part of your net worth and should be included in your net worth. Like anything else of financial value, the vested balance of your 401(k) account — or any retirement account, for that matter — is considered an asset.
How long will $3000000 last in retirement? ›
As mentioned above, $3 million can easily carry you through 40 years of retirement, making leaving the workforce at 50 a plausible option. Many dream of early retirement, but if you're lucky enough to already have $3 million set aside for this phase of your life, you could do more than dream.
According to a 2020 working paper from the Center for Retirement Research at Boston College, the top 1% of retirees—which a retiree with $4 million in assets would fall into—can expect to pay about 22.7% in state and federal taxes.
What percentage of retirees have $3 million dollars? ›
Specifically, those with over $1 million in retirement accounts are in the top 3% of retirees. The Employee Benefit Research Institute (EBRI) estimates that 3.2% of retirees have over $1 million, and a mere 0.1% have $5 million or more, based on data from the Federal Reserve Survey of Consumer Finances.
What is wealthy in retirement? ›
But that represents just the top one percent of American retirees. Here's how all the other categories are broken down, including the associated net worth for each category: Super wealthy (99th percentile): $16.7 million. Wealthy (95th percentile): $3.2 million. Well off (90th percentile): $1.9 million.
Do most retirees have a million dollars? ›
According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.
How many Americans retire wealthy? ›
In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved. If you're looking to be in the minority but aren't sure how to get started on that savings goal, consider working with a financial advisor.
What's the average net worth of a 30 year old? ›
Average net worth by age
| Age by decade | Average net worth | Median net worth |
|---|
| 20s | $99,272 | $6,980 |
| 30s | $277,788 | $34,691 |
| 40s | $713,796 | $126,881 |
| 50s | $1,310,775 | $292,085 |
4 more rowsOverall net worth (assets minus liabilities): From a big-picture perspective, the ultimate insight from a net worth statement is exactly what it says: the net worth number, which is simply assets minus liabilities. The number in isolation doesn't tell you too much, but it is a useful benchmark to track over time.
Is your net worth all your money? ›
Net worth is the value of all assets, minus the total of all liabilities. Put another way, net worth is what is owned minus what is owed.
What is a good net worth to have? ›
Determining what your net worth should be at any age can be a bit tricky, and it depends on your income. Say you're 30 years old and your income is $50,000 per year. Your net worth should be $150,000, according to this formula. A $25,000 salary at age 30 would mean an ideal net worth of $75,000.
