Net worth is a term people often associate with billionaires or celebrities. Television shows and podcasts devote entire episodes to describing the lifestyles of people with high net worth, and multiple magazines publish annual lists of individuals or families with this status. However, net worth is not just about being rich. Instead, it is about financial stability, growth, and outlook. Since it is a useful tool, net worth remains the metric for measuring the financial health of individuals, businesses, or nations. A look at the fundamentals of net worth can provide a blueprint for reaching your financial goals.
What Is Net Worth?
Net worth refers to the value of everything you own minus the total of everything that you owe. The items that you own are called assets, and the amounts that you owe are called liabilities. If your assets far exceed your liabilities, you are likely to have a higher net worth. Professionals use net worth as a snapshot of your financial health at any given time.
What Is the Origin of Net Worth?
Although the term “net worth” first arose with the overhaul of the stock market in the 1930s, the concept of cumulative wealth has existed for centuries. Historically, agricultural societies associated wealth with land ownership and livestock. With the rise of city-states and empires, gold and trade assets became of the measurement of wealth. Calculating net worth is a direct result of modern accounting that toward the end of the 19th century. Net worth now applies to personal finance, but governments also use it to assess economic strength. Businesses use it to match profit with long-term viability.
Why Is Net Worth Important?
Net worth provides a clear picture of your economic health and guidance on what happens you may need to strengthen or chance. It helps you establish a strategy instead of simply leaving things to chance. Although a high income is important, a big salary does not always mean financial security in times of inflation or political certainty. By building net worth, you can ensure that your assets cover your needs while liabilities shrink. Finally, it is important to know your net worth if you would ever like consideration for loans, investors, or business partnerships.
How Do You Calculate Net Worth?
The formula for net worth is as follows:
Net Worth = Total Assets – Total Liabilities
To calculate your net worth, you must first add up all of your assets. These items may include liquid cash, savings, and business interests or stakes. Investments like stocks, bonds, and mutual funds are also assets. You can include real estate or property ownership such as homes, rentals, land, vehicles, or boats. Finally, your assets may also include valuables like jewelry, rare collectibles, or fine art.
Next, add up all of your liabilities. These items include your outstanding mortgage balance, student loans or auto loans, credit card debt, medical bills, or any outstanding personal loans.
After adding up both categories, subject your total liabilities from your total assets. If the result is positive, this means that you own more than you owe. Accountants call this a positive net worth. However, a negative result means that you owe more than you own. Accountants refer to this as a negative net worth. Similarly, a sizeable result means that you have a high net worth, but a small number means that you have a low net worth.
What Are Examples of High Net Worth In History?
There are historical examples of individuals with high net worth. Some of the most intriguing examples include the following:
• Mansa Musa (1280–1337): As the ruler of Mali, Mansa Musa oversaw a vast salt and gold trade in Africa during the Golden Age of Islam. Many historians refer to him as the wealthiest person in history. In today’s dollars, his net worth exceeded $400 billion.
• John D. Rockefeller (1839–1937): Most business historians consider Rockefeller the first oil magnate in the United States. His net worth was approximately $340 billion in modern dollars.
• Andrew Carnegie (1835–1919): Just as Rockefeller was an oil magnate, Carnegie amassed a fortune through the production of steel. The steel tycoon had a net worth of $310 billion by today’s terms.
• Jeff Bezos (1964-Present): As the founder of Amazon.com, Bezos has a net worth that has reached up to $250 billion based on stock valuations.
How Do You Improve Your Net Worth?
Achieving a positive net worth is not just for billionaires. There are several steps you can take to boost your net worth. First, it is important to pay off your debt. Start with high-interest accounts like credit cards or personal loans. If you have long-term loans, consider refinancing to achieve a lower interest rate. For example, you can negotiate refinancing a 30-year mortgage into a 15-year mortgage. While your monthly payments may be higher, you can shave down the interest and pay your loan off in half the time. If you are invested in achieving a high net worth, you should also avoid taking on any unnecessary debt so you can focus on boosting your assets.
To increase your assets, use extra income to invest in stocks, bonds, and retirement accounts. Look into purchasing real estate that appreciates over time. Appreciative assets that increase in value with time should remain the priority over depreciative assets that lose value like vehicles or electronics. Similarly, you can also work on starting and growing a business so that your net worth will increase through ownership. Save any extra money so that you can earn compounding interest. Earning more income can allow you to put any excess into a savings account. Either negotiate a higher salary with your job or look for multiple streams of income such as freelance contracting or seasonal rental properties. To track your progress, try downloading a net worth app to your smartphone to monitor your net worth in real time. These apps are fun to use but can also increase your knowledge to change your habits for the better.
The Bottom Line
Your net worth is more than just an abstract number. It is a powerful way to understand your financial health and goals. Although billionaires get most of the press, anyone can work to increase personal net worth through smart asset management.
