Net worth
Net worth refers to the total value of an individual’s or company’s assets after subtracting their liabilities, where assets are items with recognized value and liabilities include debts or financial obligations. It serves as a crucial metric for assessing financial health, whether for individuals, couples, families, or businesses. Common forms of assets include cash, real estate, securities like stocks and bonds, and even tangible items such as vehicles and collectibles. Liabilities can range from mortgages and loans to accounts payable and tax obligations.
In practical terms, net worth is calculated by subtracting total liabilities from total assets, and can indicate either positive or negative financial momentum. For individuals, discussing net worth often involves categories such as high net worth, very high net worth, and ultra-high net worth individuals, denoting varying levels of wealth. Understanding net worth is essential for financial planning and investment strategies, as it provides a snapshot of overall financial standing and can inform future economic decisions.
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Net worth
In finance, the term net worth is used to describe the total value of an individual's or company's assets after subtracting that individual's or company's liabilities, where assets are pieces of property with recognized value and liabilities are debts or financial obligations that are owed to other entities. Net worth is widely considered one of the most important metrics used to track the overall financial health of a person or company. In business, and particularly with regard to publicly traded companies, the term shareholders' equity, or book value, is often used in place of net worth, though there are actually slight differences in meaning between these respective concepts.
Individuals, couples, and families frequently track changes in net worth, using them as indicators of positive or negative financial momentum. The terms high net worth individuals, very high net worth individuals, and ultra-high net worth individuals are also used to describe people whose relative levels of wealth are far beyond average.
Background
Assets can take many forms, with the most common including cash and cash equivalents, securities, and real estate. Cash equivalents are liquid investments, such as certificates of deposit (CDs) and treasury bills, which are at little or no risk of undergoing any significant change in value and are readily salable on the open market, making it easy to convert them into cash. Securities include stocks, bonds, and other financial instruments that represent a share of ownership in a company or other publicly traded asset, such as a mutual fund. While most securities can quickly be turned into cash, their market values tend to be far more volatile than cash equivalents and are subject to price increases that raise the value of the investment and price declines that diminish the value of the investment. Further examples of assets include artwork, collectibles, precious metals, jewelry, furniture, equipment, vehicles, and monies owed by other individuals or companies.
Other assets have values or potential values that are not as easy to define. For example, a person or business may hold intellectual property, patents, or copyrights that could turn out to be highly profitable in the future but do not presently have a universally recognized market value. Such assets are known as intangible assets, and they are usually excluded from the equation when calculating an individual's or company's net worth.
Similarly, there are also many types of liabilities. For individuals, these may include debts such as loans, mortgages, and credit balances or financial obligations that the individual will have to repay to another entity, known in this context as a creditor, over the course of time or at an agreed upon future date. Businesses can incur liabilities in other forms, including deferred revenues and accounts payable. Deferred revenues are revenues that were submitted to a company before the company supplied the products or performed the services for which it was paid. Accounts payable are monies owed to creditors, which may include suppliers, clients, customers, financial institutions, or other businesses. Both individuals and businesses can also accumulate tax liabilities, which are funds owed to municipal, regional, or federal governments on income or owned property.
Overview
In a typical accounting balance sheet, an individual's or company's assets are tallied on the left side of the sheet, while liabilities are tracked and added up on the right side of the sheet. If an entity's total liabilities exceed its total assets, the individual or company is said to have a deficit or negative net worth.
An example of how net worth is calculated for individuals might use a person who has $20,000 in the bank and investments with a current market value of $40,000. This person also owns a house valued at $450,000 and a car valued at $15,000. The total value of this hypothetical individual's assets would thus be $525,000. Next, assume that same person still owes $345,000 on his or her mortgage, owes the bank $10,000 for his or her car loan, and has $5,000 in credit card debt. That leaves total liabilities of $360,000, for a net worth of $165,000.
For businesses, use a small company that owns $750,000 in real estate, including operations, storage, and production facilities. Assume that a small company owns $300,000 worth of equipment, has $70,000 in cash on hand, and is owed $120,000 in accounts receivable, or payments for products or services that have not yet been received. The company's assets would thus carry a total value of $1,240,000. Then, factor in a $625,000 mortgage on the real estate, $80,000 in accounts payable, and bank loans of $270,000 that were used to finance the purchase of the aforementioned equipment. This scenario would leave the company with a net worth of $265,000.
Calculating net worth can be very complex, especially in the case of larger businesses. In the real world, the simple figures used in the above examples would be subject to a wide range of other factors, including appreciation (or increases in value) of assets like real estate and depreciation (or declines in value) of assets like equipment and vehicles. Changing levels of mortgage and loan debt would also occur as the individual or company pays off (or fails to pay off) outstanding obligations. Businesses of all sizes employ accounting professionals, or have entire accounting departments, to regularly track and update assets and liabilities in all classes to create a current and accurate understanding of the company's financial health.
In 2014, a global wealth report prepared by the Swiss financial services firm Credit Suisse stated that the median net worth of an adult living in the United States was $44,900. The same report also found that the average net worth of an American adult was $301,000, with the wide gap between the two figures being explained by the fact that 42 percent of the world's millionaires and 49 percent of people with a net worth of more than $50 million live in the United States.
From 2019 to 2022, the Federal Reserve's Survey of Consumer Finances found that the median net worth of an adult in the United States increased 23 percent to $192,900, while the average American family has a $1.063 million net worth. However, the discrepancy noted in the 2014 Swiss report continued to grow, and in 2022, the top 10 percent of households held 60 percent of the country's wealth, with an average of $6.9 million per household.
Financial services firms use the terms high net worth individuals, very high net worth individuals, and ultra-high net worth individuals to differentiate between the relative levels of wealth possessed by certain clients. While there are no distinctly defined cutoff points, high net worth individuals are generally those with a total net worth of $1 million to $5 million, and very high net worth individuals have a net worth of $5 million to $30 million. Ultra-high net worth individuals usually have a net worth that exceeds $30 million.
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