For far too often you learn that someone else is richer and more attractive than you. Journalists tend to use something called net worth to determine how wealthy a person actually is, but no one actually cares enough to see if the claim is true. This is why you can also claim that you have high number of net worth – any number will do, really; it can be a million, three millions, 10 millions, and so on. To make it even more convincing, say some odd numbers like US$12,345,678.99 and everyone will believe it. Now that you understand how to fake it, let us learn about what net worth is.
|These sheep have high Net Worth, but if only they can shave on their own|
While net worth is a key measure to determine how much someone or a business entity is worth, it is not practical in most cases. Some people save their money on education accounts, retirement accounts, or other types of accounts which have withdrawal restrictions, either in period or amount. It may not be practical to measure how rich or poor someone is, but net worth is a good indicator of finance progress. For example, if your net worth was $5,000 yesterday and the number says $5,001 just now, it means there is an improvement in your financial situation; in other words, your finance is in healthy condition.
Business’ Net Worth
Total current value of a company is also measured in net worth. Instead of re-calculating all the company’s assets and debts, however, accountant and bookkeepers will use the existing balance sheet compiled by someone else smarter than them, because it is quicker and easier. A balance sheet is a report of assets, liabilities, and equity that a company has in its current state. In business context, there are two types of net worth:
- Tangible, which includes all physical assets and liabilities (both short term and long term)
- Intangible, which also calculates the values of all things that are too complex to quantity for examples patents, customers list, and reputation or goodwill
Balance sheet is easier to use because it only tells the value of a company in its current state. It lists all tangible assets such as building, lands, unsold products, printers, pencil sharpeners, plumbing augers, and everything else you can find in the warehouse. Another thing in the balance sheet is liability or debt. The difference between the values of assets and total debts is the net worth.
When accountants have some spare time, they can calculate the market value of a company. The process is almost exactly the same as measuring net worth, but it must also include intangible assets in the equation. Intangible assets, as the name suggests, have abstract nature so it is difficult to determine their actual value in money. Even accountants may need to hire valuation expert or just make wild guess; the only difference is that the latter is much more affordable.
When the company wants to lend money from financial institutions such as a bank, it must compile and provide balance sheet report for the bank to scrutinize. In case the bank deems the company’s financial condition to be healthy, credit application is more easily approved. Most (if not all) banks try to stay away from making valuation of intangible assets because bankers are apparently too busy straightening their neckties. Banks want readily-quantifiable assets as collateral. This is why banks will not approve your credit application just because you have a million-dollar imagination.
Individual’s Net Worth
The net worth of an individual is simply the total amount of money a person has after he/she subtracts all the debts from assets. At a glance the calculation of an individual’s net worth seems simpler than that of a business’ or company’s but it not always correct. People are neither assets nor intangible assets, and this makes the calculation appears easier. You must remember that tangible assets can be anything from house, cars, stocks, socks, wristwatches, saving account balances, a napkin signed by David Lee Roth, politician’s pee-tape, and all other possessions with considerable values. Debts may include mortgages, student loans, unpaid parking tickets, etc. Put in mind that some assets can depreciate and increase in value over time, so the exact price that you paid when you bought an item should not apply. For example you paid $20 for the biggest organic apple last week but haven’t had a chance to eat it; now you are selling it online and no one is buying because the apple is rotten. Thankfully the value of your house has increased so the depreciation of organic apple is well offset.
In the event you have negative net worth, you must file for Chapter 7 Bankruptcy to eliminate most of (if not all) of the debts but your properties will be sold to pay the creditors. Some of your liabilities may not be discharged at all for examples taxes. Just because you filed for bankruptcy, it does not mean you don’t have to pay taxes anymore. Bankruptcy has long-term financial and legal consequences, so it is recommended that you hire an expensive attorney who costs a lot of money. U.S. Courts allow you to file bankruptcy without attorney – which costs you almost nothing except for the taxi - but since you are prone to making mistakes and misunderstandings of the law, hire an attorney who receives payment over time or just don’t go bankrupt.