Also known as net worth, net wealth is the total value of assets owned by an individual, company, or other type of organization, less any current liabilities. The goal of most businesses and households alike is to generate a positive net wealth, meaning that the total value of asset surpasses the total amount of debt that is currently owed. There are some slight differences in how net worth or wealth is recorded in various settings, although the basic formula applies for individuals and business entities.
To calculate net wealth, it is first necessary to determine the value of the assets owned by the entity. In many instances, this means considering the current market value of the assets in question, allowing for factors such as depreciation. In the personal accounting records of individuals, the value or worth of the assets is recorded directly as this current market value. For businesses, the asset is typically listed as the original cost of purchase while also identifying the amount of depreciation accrued on that asset since the purchase took place.
Once the value of all assets is determined, the next step is to identify the total amount of liabilities currently owed by the individual or company. For households, this often means any outstanding credit card debt, the balance on car loans and mortgages, and any accounts or tabs that are currently run at local shops. Businesses would also include any outstanding balances due on real estate holdings, equipment, or any receivables that have been declared uncorrectable but are still reflected in the accounting records of the business and have not been written off as bad debt.
After determining the amount of assets and liabilities associated with the individual or company, the calculation of net wealth is very simple. By subtracting the total liabilities from the total assets, it is possible to identify the current level of net wealth held by that entity. Ideally, total assets are greater than total liabilities, indicating the net worth or wealth is positive. In the event that total liabilities are greater than total assets, the net worth or wealth of the entity is considered negative.
Enhancing net wealth typically involves the dual process of refraining from taking on additional debt while also settling current debt, and seeking ways to increase the value of assets at the same time. For example, if a household currently has a net wealth of $50,000 US dollars (USD) that reflects $10,000 USD of credit card debt, paying off the credit card balances and choosing to note make additional purchases will result in increasing the net worth of that household to $60,000 USD. Assuming the household owns stock in one more companies that generates $5,000 USD in dividends during this same period, the net wealth increases from the original figure of $50,000 USD to $65,000 USD.
