Most people measure their wealth or richness based on the assets they own, such as house, car, clothes, jewelry, watch, electronic gadget, etc. The more material things they acquire, the richer and wealthier they think they are.
However, the true measure of wealth or richness doesn’t rest upon the assets you own, but on net worth.
The Real Measure of Wealth and Richness
Net worth represents the total assets you own less the total liabilities you owe.
NET WORTH = TOTAL ASSETS – TOTAL LIABILITIES
As mentioned, total assets pertain to all the tangible and intangible properties you were able to buy or acquire. On the other hand, total liabilities refer to the amount of obligation or money you owe an individual or organization – such as financial institutions, banks, credit card companies, etc. – in order to purchase your assets.
Sample Illustration # 1: Financially Poor
You purchased a luxurious house and lot worth $100,000. And in order to pay the house, you entered into a house loan with a banking institution with interest of 18% amortized and payable for 20 years. The total amount of liability or loan value will be $370,394.40.
In this example, your total net worth will be ($270,394.40), computed as follow:
Asset (House & Lot) $100,000.00
Liability (Loan Value) 370,394.40
Net Worth ($270,394.40)
As you see in the example, your total net worth is negative. This indicates that you owe more liabilities over the assets you own. Such situation shows you are financially poor no matter how expensive and luxurious your house is since the total amount of money you owe is more than the total amount of asset you own.
Sample Illustration # 2: Financially Rich
On the other hand, example you purchased a simple house and lot worth $50,000. And in order to buy the said property, you used up your own money amounting to $35,000 and then asked for a loan from three friends for $5,000 each, with no interest to be paid after one year.
In this example, your total net worth will be $35,000, computed as follow:
Asset (House & Lot) $50,000
Liability (Loan Value) 15,000
Net Worth $35,000
In the second example, your total net worth is positive. This indicates that you own more value of assets over the amount of liabilities you owe. Such situation shows you are financially rich no matter how modest and simple your house is since the total amount of assets you own is more than the total liabilities you owe.
Steps in Determining Your Net Worth
- Identify all your assets (material possessions) and then total it.
- Identify all your liabilities (loan value or amount you owe/ borrowed) and then total it.
- Compute your net worth by subtracting your total liabilities against your total assets.
- If the amount is positive, you are financially okay or rich. While if the amount is negative, you are financially poor or unstable.
If you want to become financially rich, your goal is to focus on increasing your assets while decreasing your liabilities. Once you are able to do this, only then you can truly become rich and wealthy.
Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones. – Benjamin Franklin