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.
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| 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.