Net Worth definition

Net worth definition

We hear the term net worth thrown around a lot when we’re talking about celebrities. Amazon’s Jeff Bezos currently has the world’s highest net worth (a truly astounding $145.3 billion) and in the worlds of music and entertainment, Steven Spielberg ($3.7 billion), Oprah Winfrey ($2.8 billion) and Jay-Z ($930 million) have some of the highest estimated net worth values. It’s obvious that net worth has something to do with the amount of money an individual has, but many mistake it for a collective total of their earnings to date or some intangible statement of worth. Net worth is a very tangible thing though and we’ve broken down exactly what it is.

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What Net Worth Means

Net worth is not about how much a person earns, but how much the sum of the things they own are worth after taking away the value of any debts they have.

Net worth is the figure that is produced when you balance two things – assets and liabilities. In this context, assets are anything that’s owned by a company or individual that has monetary value and liabilities are any obligations that take away your resources. Liquid assets are things that can quickly and easily be turned into cold, hard cash; for example, money held in a bank account or in stocks and shares that could be sold to improve cash flow. Non-liquid assets take time to be turned into cash and can include things like property, equipment and long-term investments. They will still contribute to your net worth but are less useful in times when the value of your liabilities increases. To explain it in the simplest terms, assets are ‘money in’ and liabilities are ‘money out’.

Are net worth estimates accurate?

Yes and no. It’s very difficult to accurately estimate an individual’s net worth without access to highly confidential, private information like their bank accounts. Many cultures, including us Brits, are squeamish when it comes to discussions of wealth, meaning that our financial health is often a topic that is skirted around. Most estimations of celebrity net worth are often wildly inaccurate and can be hugely inflated or underestimated, depending on what will make the best headline at the time. If a notable figure’s reputation relies heavily on them being seen as someone with a high net worth, they may even spread fake figures around to bolster their image as a good business person. So even though some sites including estimate what they believe figures in the public eye could be worth, their findings should be taken with a pinch of salt.

For businesses, it’s easier to get an accurate picture of their net worth. Every year, limited companies in the UK (a type of company structure that removes the personal liability for any business debts from its directors) must publish their accounts which show how much the company has made among many other things. These statements make it easy to see what’s coming in to a company and what’s going out, and often include a section stating the company’s current net worth.

How Net Worth Is Calculated

Put in the simplest terms, net worth is calculated by adding up the value of everything an individual or company owns (their assets) and then subtracting any money they owe (their liabilities). If the value of the assets is greater than the value of the liabilities, the company or individual has a positive net worth. Assets minus liabilities = net worth. A good net worth is one that is still looking healthy after subtracting all liabilities, indicating that the value of the things you own covers the money you owe.

Can net worth be negative?

Net worth can be negative if the value of your liabilities is higher than the value of your assets. This is a sign of very poor financial health and can have negative consequences for both individuals and companies. If an individual’s net worth is negative, it means that the value of their debts (like credit card, mortgage, car finance etc.) is higher than their assets (savings, investments, income from a job) and resolving this usually results in bailouts from friends and family or, in the worst-case scenario, bankruptcy.

If a company has a negative net worth, it will need to free up assets to try to balance its books. Failing this, it may seek further investment if it can prove to investors that it has a strategy to improve company profitability and increase the value of its assets in the future. However, persistent negative net worth will usually result in the liquidation of a company, as it has no other way to pay its debts and remain in business.

Why Net Worth Is Important

Net worth is important as it can provide an individual or business with a clear picture of their financial health. It can be easy to allow debts to spiral without knowing confidently that you have sufficient assets to cover them, but calculating net worth regularly can highlight issues before it’s too late to address them. For example, if a company has an extended period where its liabilities outweigh its liquid assets (or assets in general), knowing this in advance can help it shift the balance back to a positive net worth or minimise the impact of the increased liabilities.

What net worth is rich?

Individuals who have more than $1 million USD in liquid financial assets are called a ‘high net worth individual’ (HNWI). The figure will vary depending on the country the individual lives in and the bank that they choose to store their assets in, but generally those who fall into this category will qualify for separately-managed accounts that receive more attention that a normal customer’s. HNWIs are also in high demand by private wealth managers, as they can prove to be lucrative clients due to the unique challenges their wealth brings and specialist knowledge a financial advisor will need to properly manage them.

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