What is net worth?

We often hear the phrase “net worth” thrown about in the Media, particularly about celebrities. However, it is important that we fully understand how net worth is calculated, and why this may not be the best representation of wealth.

How it is calculated

Net worth = Total Assets - Total Liabilities

An example of this would be to take your assets list (tech, car, house) and deduct any liabilities (credit card debt, student loans, mortgages). From doing this sum, you should end up with your net worth.

Why it matters

Often, it is easy to look at someone’s lifestyle and assume that they are very wealthy. However, in the 21st Century where it is easier than ever to pay for everything on credit. From using Buy Now Pay Later (BNPL) schemes such as Klarna to buy clothes, to racking up huge credit card bills, there are millions of people who unfortunately live like this.

From the outside it may seem that they are very wealthy, but when it gets down to net worth they may even have a negative figure if they have no assets to show for it.

Really, nobody goes around comparing net worths with each other but it is certainly a good thing to know for yourself. As long as you can keep that net worth positive, that is fantastic but it is also important to try and increase this over time as this is an actual indication of you growing your wealth.

Is it accurate?

As long as the figures you put into the sum are correct, your net worth will be pretty spot on!

However, the figures thrown around in the News often are wildly inaccurate. You cannot truly estimate someone’s net worth without having direct access to all of their financial records.

For example, if someone owns 10% in a publicly listed company, we can obtain a market value for their investment quite easily but we haven’t taken into consideration how much is in their bank, properties they own, how much debt they are in, etc.

Therefore, when looking at net worths in the Media, I always take it with a grain of salt as it is likely highly inaccurate.

On track?

According to the book The Millionaire Next Door, a rough rule of thumb calculation is to do the following:

Take your pre-tax salary and multiply it by your age, then divide by 10.

However, there is no one-fits-all answer, and you should not feel disheartened if your net worth is vastly different to this!