How Is Net Worth Calculated? - The Full Guide
Net worth is a term that refers to the total value of assets minus liabilities. If you want to calculate your net worth, you should include both tangible and intangible assets.
Net worth is a useful tool for measuring financial stability. For example, if you’re thinking about buying a house or taking out a mortgage, you might want to know how much you would owe after selling all your possessions.
You can calculate your net worth using two methods: the balance sheet method and the income statement method. The balance sheet method is easier to calculate, but the income statement method gives a better picture of your overall financial situation.
Also read: How To Calculate Net Income
The Balance Sheet Method
To calculate your net worth using the balance sheet method, first list all your assets on one side of the page. Then list all your debts and other liabilities on the opposite side of the page.
Add up the values of your assets, then subtract the amount of debt from this total. You now have your net worth.
For example, let’s say you own a home with a market value of $150,000 and a monthly mortgage payment of $1,200. Your total asset value is $150,000 – $1,200 which equals $149,800. Your total liability is also $1,200 per month in payments. So, your net worth is $149,800 – $1,200 which equals $148,700.
Also read: What Does Annual Income Mean?
Income Statement Method
If you prefer, you can use an income statement to calculate your net worth. To do so, add up all of your income (including any interest) over a specific time period. This will be referred to as your “gross income.”
Then deduct all of your expenses (including taxes) from your gross income. This will be referred to as your “net income.”
Your net worth is equal to your net income divided by 12 months.
Let’s look at an example. Let’s assume you earn $10,000 per year and pay $2,500 in taxes each year. In addition, you spend $3,000 on rent. Your gross income is $10,000. After paying taxes, your net income is $8,000. Divide $8,000 by 12 to find your net worth.
In this case, your net worth is equal to $8,000 ÷ 12 $667.33.
This calculation includes only your income and does not take into account any increase or decrease in your assets.
Also read: How To Calculate Retained Earnings?
What Assets Do I Need to Include?
When calculating your net worth, it’s important to include everything you own. However, there are some items that don’t need to be included.
For example, if you own a car, you probably won’t include its value when calculating your net worth. But, if you own a business, you may want to include its value.
It’s also possible to include things like insurance policies, retirement accounts, stocks, bonds, mutual funds, etc., even though they aren’t technically considered property.
Do I Have Any Liabilities?
It’s also essential to note whether you have any liabilities. A liability is anything you owe someone else. Examples of liabilities include credit card balances, student loan payments, medical bills, etc.
Liability amounts should always be subtracted from your net worth. If you have no liabilities, your net worth is simply equal to your assets.
Can I Use Both Methods?
Yes! While both methods work well, you might decide to use one method more than another depending on what information you feel is most relevant for you.
Increasing Your Net Worth
The best way to increase your net worth is to save money. The less you spend, the more money you have available to invest.
You can start saving money right away by cutting back on unnecessary spending. For example, instead of eating out every night, eat dinner at home once a week. Instead of going shopping every weekend, go shopping once a month.
You can also boost your savings rate by investing your money. Investing allows you to grow your wealth without having to rely solely on your salary.
Is Investing In Properties The Best Way To Increase Your Net Worth?
Although real estate investment trusts (REITs) are great ways to generate passive income, they are not the best way to build your net worth.
A REIT invests in properties such as apartment complexes, office buildings, hotels, etc. These investments are generally very safe because they are backed by mortgages.
However, these types of investments are often illiquid. Illiquid means it is difficult to sell quickly.
If you buy shares in a REIT, you will receive dividends based on how much profit the company makes. You will also receive distributions if the company sells off parts of its portfolio.
If you choose to invest directly in a property, you may need to make mortgage payments. This means you will have to borrow money to purchase the property.
In addition, while you can rent out your property, you will still need to pay taxes and other expenses. Therefore, unless you plan on living in the property forever, you will likely lose money over time.
To conclude, you can calculate your net worth by either subtracting your debts or adding up all your assets. However, it’s usually better to add up your assets first and then subtract your liabilities. This will give you a clearer picture of where your finances stand.
Once you know this information, you can begin making smart financial decisions that will help you reach your goals. There are many ways that you can increase your net worth, but you should engage in thorough research prior to making any investments in an attempt to increase your overall net worth, as you could end up losing money if you make rash decisions.
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