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?
According to Bloomberg’s Billionaires Index, Steven Spielberg ended 2022 as the wealthiest individual in the entertainment world. Once again the film director topped the rich list with an annual income of $150 million (figures from Celebrity Net Worth) and reported to be worth $7.25 billion on paper. We often hear about net worth, but what does it actually mean?
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In simple terms, net worth is the value of a person’s wealth including their income and total assets - after subtracting debts. These hard assets can take different forms, for example: stocks, shares and bonds, real estate, art, cars, and many other valuable or collectible goods. Debt or liabilities can take various forms as well, including loans, credit card debt and so on.
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 the other assets they hold.
Why is so difficult to calculate one’s net worth?
While an individual’s annual income is easy to establish, totting up all of the hard assets they possess and estimating the total value of those assets is not so simple. So when talking about the ultra-rich, making a net worth calculation can be extremely 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 taking advantage of weak tax codes, loopholes in the system, 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 35 current and former world leaders like Russian president Vladamir Putin 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, collectibles 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 directly proportional 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 to $121,760; 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.