What is Net Worth? - And how does it work?

 

Money! One of the most important things in life. In fact, there are so many related things to it that telling all about them just in one article is nearly impossible! But we often hear and see people talking about the Net Worth of certain people, groups or even businesses. But what is it actually, and how does it work? Well, we'll get to know about Net Worth, in this article. So let's begin!

Assets & Liabilities:

To understand what is Net Worth, we first must understand what Assets and Liabilities are. So let's begin with Assets. 

Let's first talk about some common things you might own or have at home. So let's imagine a kid, who has $20 of his own pocket money, owns a smartphone worth $500, a few toys worth $50, and has borrowed $15 from one of his friends. Now, the valuable things that are owned by you, or the things which could bring you money in future are called Assets. Now the exact opposite of this will be as follows: money and the things that you have borrowed from someone and have to return to them, or the things you have to pay for, are called your Liabilities. 

So in short, Assets are money or things that you own and can bring you more money in future, while Liabilities are money or things that you owe to someone, and have to pay for. Isn't it simple? But it'll be a good idea to also know some of the examples of Assets as well as Liabilities. 

Examples of Assets & Liabilities:

Let's know a few examples of assets as well as liabilities to understand better or more clearly. 

Examples of Assets: Cash, Your Money in a Bank account, Real estate you own such as houses, lands, and properties, and vehicles you own. 

Examples of Liabilities: Borrowed money or loans that you have to repay, credit card as you have to repay it, taxes you have to pay to the Government, etc. 

The Net Worth Formula:

So, enough of all these what you have, what you pay and all the stuff! Let's finally understand what is Net Worth exactly. So Net worth has a simple formula:

Assets (What you have) - Liabilities (What you owe) = Net Worth

For example, you have $100 worth of cash and other stuff. But you have borrowed some cash or something from a friend, worth say $40, then your Net Worth will be: 100 - 40 = $60. Isn't it as simple as addition and subtraction? 

In the most simple words, Net Worth is the amount or worth that you 'actually' own, after subtracting everything that you have to pay others, if you owe others anything. It gives you an idea of your financial status at a given point in time. It allows you to think and decide how much you want to spend, save and invest. 

Positive vs Negative Net Worth:

Lastly, how do you exactly measure or know whether your Net Worth is good or bad? In other words, how do you know that you're doing fine or well, or that your money management requires some improvement? Well, it's simple! Net Worth can either be positive or negative. But how does it become positive or negative? Let's understand. 

When you have more Assets than Liabilities, it means that you have things worth more than the things that you have to pay to others, or you owe to others. In this case, if you apply the Net Worth formula, subtracting liabilities from assets, you will get a positive value. Hence, your Net Worth will be positive, which is a good sign that you're doing well, and you own more than you owe. 

When you have more Liabilities than Assets, it means that you owe things worth more than the things that you own. In this case, if you apply the Net Worth formula, subtracting assets from liabilities, you will get a negative value. Hence, your Net Worth will be negative, which indicates that you owe more than you own, might need improvement in your money management and you should start paying off what you owe to others. 

So kids, this was a short and crisp article, just for you, to understand and get to know Net Worth. As a fun activity, you can try to calculate your own Net Worth and flaunt it to your friends, in a friendly manner of course! We hope you liked this article! 

HAPPY LEARNING!