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What does net worth mean? How is someone's net worth calculated?

The net worth of wealthy individuals is talked about frequently, but very few know exactly what this indicator actually represents. How is it calculated?

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What does net worth mean? How is someone's net worth calculated?
SPENCER PLATT AFP

Net worth is the value of a person's wealth including their income and total assets, after subtracting one's debt. These assets can take different forms, for example, stocks and bonds, homes, art, cars, and many other goods. Debt or liabilities can take various forms as well, including loans, credit card debt, and more.

Many of the richest people in the world do not derive the majority of their wealth from their income or labor, rather it is represented in their other assets.

Why is so difficult to calculate one's net worth?

 Many of the richest people in the world do not derive the majority of their wealth from their income or labor, rather it is represented in their other assets. Thus, when talking about the ultra-rich, making a net worth calculation can be very difficult. 

First, because many wealthy people tend to hide the true value of their assets to avoid paying taxes. The Pandora Papers which were released through an international investigative effort found that many world leaders and business owners were using taking advantage of weak tax codes and at times using illegal accounting practices to hide their wealth in offshore accounts.

 Who was named in the Pandora Papers?

More than three hundred public officials, including thirty-five current and former world leaders like Vladamir Putin of Russia and King Abdullah II of Jordan, were named.

Calculating Your Net Worth

To figure out your own net worth you can add up the value of all your assets and then subtract the total amount of debt that you owe. For example, if you have $50,000 in a savings account, $5,000 in a checking account, $10,000 in other assets (jewelry, car, etc.) but you also owe $10,000 in student loans and $2,000 in credit card debt, your net worth would come out to $53,000. This is because you have $65,000 in assets and $12,000 in liabilities.

What is the average net worth in the United States? 

Net worth in the United States is very closely linked to age. Older generations who have worked for more years and acquired more assets typically have more wealth. In September 2020, the Federal Reserve Board published a report showing that the average net worth for households in the US was $121,700.

However for those between the ages of 65 and 74 the average was nearly double. The report also found that “Between 2016 and 2019, median net worth grew 18 percent, and mean net worth rose a modest 2 percent.” This growth, while notable, came after a period of declining net worth as households stabilized their finances after the 2008 Financial Collapse.