What is Net Worth?
Net worth is the value of all the non-financial and financial assets owned by an institutional unit or sector minus the value of all its outstanding liabilities. But to put it simply, net worth is basically the amount by which assets exceed liabilities. It is a key for individuals and businesses to measure how much they are worth. Net worth can apply to companies, individuals, governments or economic sectors.
Your net worth is like a financial snapshot that shows the dollar value of what you own and what you owe. If your assets exceed your liabilities, you have a positive net worth. On the other hand, if your liabilities are greater than your assets, you have a negative net worth.
But it should be noted that even a person with a high net worth may have financial difficulties. Having many assets with low liquidity (inability to immediately convert assets to cash) may mean not having adequate cash available to pay current expenses if income suddenly decreases, which on its own can present another set of difficulties.
- Net worth is calculated thus: Assets – Liabilities = Net worth
If you have $200,000 in total assets, and $125,000 in total liabilities, your net worth would be equal to $75,000, that is ($200,000 – $125,000). This is the basic principle that is used in the calculation, and if you get your figures right, your net worth would always be accurate.
How to Calculate the Net Worth of an Individual You Don’t Know
But what happens when you want to calculate the net worth of an individual you do not know personally, say a friend; how do you go about it? Is it even possible?
Considering the fact that you have to know the correct value of the assets and liabilities a person has before attempting to calculate an accurate net worth for him or her means that it may be a little difficult to calculate the net worth of a person you hardly know.
To start, you would need to know what the person owns, what those assets are worth, and what the tax implications would be if those assets were sold, what assets are hidden, currency fluctuations, and more. But there is a way around this situation. The only way around it is if the person in question provides you with their spreadsheet or gives you a correct value of their assets and liabilities.
If you really don’t know this person personally and there is no chance that you can gain access to their spread sheet, and you are not close enough with them to be handed information on their assets and liabilities, then you have to make do with the information you glean up about them. If the person is a public figure, you can start by establishing the person’s net worth by analyzing publicly available records, articles, contracts and videos.
If the person is not necessarily a celebrity, you can make an educated estimate based on their income, age, real assets, and spending habits. This would give you an average estimate. To calculate their net worth, you can start by adding up their assets that are visible to you. Such assets may include;
- Retirement investments. This will include employer-sponsored retirement plans, such as 401(k) and 403B plans, as well as personal retirement assets, such as traditional or Roth IRAs or solo 401(k)s.
- Real estate. This includes the market value of their primary residence, as well as any other property they own, either for investment or for pleasure. You should try and get a general estimate for this, and websites such as Zillow or Redfin can help you with estimated home values that you can use.
- Business assets or equity. If the person is a business owner, you may want to include the net worth of their business, or any significant business assets you know they have.
- Personal assets. These can be cars, furniture, jewelry and other personal effects. Many people do not include these in their net worth calculation either because they have no intention of ever selling them, or because they have very little resale value. For someone you hardly know, you may have to focus on just their cars and furniture.
- Personal loans receivable. These are loans that have been made to family, friends, or business associates. Include them if only you are sure of the amount in question.
The next step would be to add up their estimated liabilities. They can be;
- Mortgages. This includes the first mortgage on their primary residence, and also a second mortgage or home-equity line of credit, if they have any. Be sure to include outstanding mortgages on any investment or recreational property as well that you know of.
- Installment loans. Car loans are the first to come to mind, but you should also include any other installment loan arrangements on things like furniture, boats, or motorcycles.
- Student loans. Student loans are usually visible to people, so there is a likelihood that you may know if they still have student loans or not. If you do not have this information, you can skip it.
- Credit cards. Credit cards represent revolving debt, which means their balances are constantly changing, so you need to be careful when calculating these. But you may not have access to these, if you don’t just skip it.
- Business loans. Chances are high that any loans that are taken out for business purposes are also a personal liability, and should be included in the calculation of net worth. Again, careful research would reveal this information about the person, if it exists.
- Other liabilities. This can include medical debts, tax liabilities, or any other obligations that don’t fit neatly in any of the above categories. If the person in question is a celebrity, you can easily gain access to their task liabilities.
After tallying up the liabilities that are available to you, you now have to subtract it from their assets to get the net worth of the person in question.
You have to note that this net worth calculation is by no means accurate because you do not have access to their complete assets and liabilities. This means that your calculation is just a rough estimate that can give you an insight into their real worth. This is basically how people calculate the net worth of celebrities.